A turning point: Sovereign bond yields soaring

The thesis remains the same — although the repercussions will vary.

If you’ve been perusing social media, particularly X, lately, you’ve seen a parade of pundits remarking on the debt trap that the Fed and other central banks find themselves in.

It’s essentially the same story I’ve been preaching for the last decade... but it all appears to be coming to a head right now.

In short, the inflationary implications of higher oil prices are driving traders away from risk assets (stocks, metals, bonds, etc.) in fear of a hawkish Fed monetary policy in response.

Simultaneously, longer-term investors as well as other central banks are cutting back or even selling U.S. Treasuries due to the inescapable math of debt and rising debt service costs...and in many cases because they simply need the money.

The end result is that Treasury yields have been soaring on both the short and long ends since the Iran war began. And this has helped drive gold and other assets lower.

I posted this chart on X yesterday showing the very strong inverse correlation lately between 10-year Treasury yields and gold:

Even more importantly, real yields (yields minus the rate of inflation) have been rising precipitously. Our friend Peter Boockvar noted this development and posted a chart of the real 10-year yield to accompany his comments:

“There is a common belief that the only reason why bond yields are rising is because of growing inflation worries. While that is true in part for sure, the big jump in REAL yields over the past few weeks says that it is something more. The 10 yr REAL rate is up 25 bps just over the past week and a half, and I’ll argue again that global debts and deficits now matter in the eyes of lenders.”

REAL 10-Year Treasury Yield

So what does all this mean?

Simply put, a major turning point for the markets lies ahead.

The Fed will need to raise rates to corral inflation... but it simply can’t because of the debt trap. Investors increasingly recognize this, and are demanding higher returns on Treasurys to compensate for the risk.