Why are bond yields soaring??

Thursday 10th April 2025

(Kelly Evans’s morning commentary & top market stories.)

It's strange enough for bond yields to rise during a market panic. It's even stranger when they start spiking like they are right now.

The 10-year U.S. Treasury yield was below 3.9% on Monday. That made sense. Stocks were plunging, recession fears were growing, and buying Treasuries as a safe haven is a classic "flight to safety" trade in markets. But then it stopped going down. By yesterday morning, it had spiked to nearly 4.25%. By this morning? Over 4.5%!

This creates a number of problems. It pushes up mortgage rates. It could potentially catch banks wrong-footed (remember the collapse of Silicon Valley Bank et al). It throws trading systems into disarray. It's even reverberating to places like the U.K., whose long bond is now also being pushed to three-decade high yields and could force more tax hikes or spending cuts.

So why is this happening? The knee-jerk response is to assume the Chinese are doing it. Which would make some sense--their tariffs won't bite us as much as ours will bite them. Retaliating by selling their massive portfolio of Treasuries would carry a certain poetic justice, especially as the Treasury Secretary has repeatedly emphasized that his key focus is to get the 10-year yield down.

The trouble is, it doesn't completely make sense. The Chinese selling Treasuries should also push their currency up at precisely the moment it is falling to absorb the tariff shock.

So what if it's not the Chinese? This possibility may be even more alarming. Or perhaps we could say, there's a less-alarming and more-alarming version of it. The less-alarming version--which has some credence--is that trading desks are blowing up. There were rumors in particular of a Japanese bank having problems, which may explain why Japan's 40-year yield also soared more than 30 basis points overnight.

If this is "just" a positioning flush, it would be somewhat reassuring. The weirdness of yields spiking during a market panic is probably causing a lot of pain in the financial world (hence all the chatter about "basis trades" unwinding and so forth). It would be rather poignant coming as the Treasury Secretary reiterated in a speech this morning that while Wall Street has flourished for the past four decades, "for the next four years...it's Main Street's turn."

Less reassuring, for both Wall Street and Main Street, is if yields are spiking because of an inflationary panic. The 10-year TIPS yield, an inflation proxy, has surged from 1.7% on Monday, to nearly 2.2% today. Stagflation concerns are growing as the escalation of tariffs (as with China again this morning) continues. "Bottom line: 3.5% inflation and zero growth. Good old-fashioned stagflation lies ahead in the next two quarters," wrote one prominent Washington economist this week.

"Then things get better," he added, with lower inflation and faster growth than we have now. "But this won't become evident until mid-2027 or so." The president clearly wants to wait this out--if he can. The real pressure is now on Republicans in Congress, who are scrambling to pass the budget bill extending the expiring tax cuts as quickly as possible to both offset the near-term tariff hit to the economy, and do so before losing the support of vulnerable midterm Republicans.

The silver lining for the president and the GOP is that gas prices are falling right now, easing some of the stagflationary shock that Americans could now experience. The problem is, consumer sentiment was already at near-Covid lows.

And the bigger challenge for markets is knowing this may keep the Federal Reserve on the sidelines, not wanting to cut rates amid rising inflation even if the economy slows. Expect them to become more proactive if (a) we start losing jobs, or (b) Treasury yields keep spiking, and they start buying more bonds again. "I'm glad I don't have Chair Powell's job," quipped Apollo's Marc Rowan in this excellent interview this morning.

Kelly Evans

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