Bond Market Sell-Off Intensifies: Unpacking the Drivers of Rising Yields

Treasury yields snapped higher Tuesday, breaking a six-week trading range and thwarting the bond market’s traditional role as a haven in times of stock market volatility. When Treasury yields move higher, prices fall. Tuesday’s jump in the 10-year Treasury yield to 4.3% broke a range that was steadfastly between 4.1% and 4.2%. The benchmark 10-year is important because it affects lending rates on business and consumer loans like mortgages. It is also closely watched in the stock market, where higher yields make investors nervous. By afternoon in the U.S. session, the bond market was somewhat calmer. But strategists say there is potential for a lot more volatility in the near term, given the unusual brew of economic, geopolitical, fiscal, and Federal Reserve-related events hanging over the market. Tuesday’s yield move kicked off after Japanese bond rates moved higher, reflecting investor unease about Japan’s proposed increased spending plans after the announcement of a snap election Feb. 8. Yields also were boosted by concerns that a new trade war between the U.S. and Europe will spark inflation. Dollar weakness also contributed to the lower yields, as investors dumped the greenback in reaction to President Donald Trump’s efforts to acquire Greenland. “I think a lot of this is based on Japan,” said Jim Caron, chief investment officer at the Portfolio Solutions Group at Morgan Stanley Investment Management. Tariffs and inflation play a role, too. “There’s no safe place to hide. Bonds and equities are both getting hit,” Caron said. A nagging theme in the market is whether foreign investors will shy away from Treasuries because of Trump administration policies. That talk surfaced again Tuesday, as the dollar sank and Treasuries sold off. There is no real evidence of large investors abandoning Treasuries at scale, but investors did move into gold as a safety play, sending the precious metal to a high. The market “was revisiting the mid-April theme to sell U.S. assets sentiment,” said Ian Lyngen, who heads U.S. rate strategy at BMO. The trade that developed over the long weekend “was technically set up to have room to run, and it has, but perhaps not as far as one might have thought it would.” Markets were roiled after Trump announced on April 2—so-called Liberation Day—that he would level tariffs on dozens of countries. He then negotiated lower tariff rates with many countries. “I don’t think we’re going back to the post-Liberation Day trade dynamics,” said Lyngen. “I think this is an incrementally bond bearish impulse.” Investors are watching events unfold around Trump’s attempts to acquire Greenland and the threatened new tariffs between the U.S. and Europe. Trump speaks at the World Economic Forum in Davos, Switzerland Wednesday. Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute, said the bond market has a high tolerance for Trump’s threats. “I think the market learned a really good lesson after April 2,” he said, referring to the “Liberation Day” sell off. “He uses this as a way to get people to the table to negotiate.” Bond strategists say the market isn’t pricing an extreme outcome for Greenland, meaning it doesn’t expect annexation by the U.S. or a military invasion. Trump has said the U.S. needs Greenland for security reasons and to protect it against China and Russia. The island is controlled by Denmark, and the Danes and their European neighbors want to keep it that way. Alvarado said the move in the 10-year yield toward 4.3% isn’t a surprise. “To be honest, the level they are at right now seems to be more in line with fundamentals,” he said. There are also developments expected around the Fed. The president could soon nominate a new Fed chair, but much more market-moving might be the continuing Supreme Court case on Trump’s efforts to remove Fed governor Lisa Cook. Oral arguments in that case are Wednesday. The Trump administration alleges Cook committed mortgage fraud and that the president has a right to remove her. Cook denies the allegations. “The risks are asymmetrical because if nothing happens and Cook stays, the markets stay where they are,” said Alvarado. If Cook is fired, that would be seen as giving the president the green light to replace other members, hurting the central bank’s independence. That would send yields higher on the fear the Fed would lower interest rates, as the president wants, instead of holding them higher to fight inflation. This week’s move higher in rates on Japanese government debt also raised concerns about the potential for investors to move away from U.S. debt. The yield on the 40-year JGB rose to a record high. The move pushed yields around the world higher, including in the U.S. In a Fox television interview, Treasury Secretary Scott Bessent said he spoke to his Japanese counterpart and expects Japanese officials to work to soothe the market. “A longer theme is what will Japan do, and will that entice investors to sell their Treasuries, get those dollars and bring them back in order to invest” at home, Alvarado said. The market is also awaiting a ruling from the Supreme Court on whether Trump was able to use his emergency powers to put tariffs on dozens of countries. That ruling isn’t expected to be favorable for the president, but he has said he has other legal tools he can use to impose tariffs.