Bonds in the danger zone: Global yields surge, Oil climbs above $90

Well, good morning – brace yourself – the bond market is screaming and someone better start paying attention…

Yesterday saw the TLT and TLH both lose ground – falling 0.85% and 0.65% respectively – leaving those bonds down 6.7% and 5.5% ytd. The 10-yr Treasury yield surged up and thru 4.7% to end the day at 4.72%, the 30 yr rose 5 bps to end the day at 5.30% putting both right up against the ‘danger zone’.

And THAT matters because investors need to understand that the long end of the treasury curve is tightening financial conditions independent of the Fed. Remember – we did not get a formal rate hike last month, so the move is completely market forces taking control. And that’s what makes this dangerous.

So why is this happening? Pick your poison: persistent inflation, nearly $2 trillion annual deficits, exploding government debt, a flood of Treasury issuance, massive corporate borrowing to fund the AI buildout, fiscal uncertainty heading into the mid-term’s elections AND current demand from some of the traditional buyers of long-dated U.S. debt - think pension funds, life insurance companies and foreign central banks is weakening.

Now - this is important - weakening doesn’t mean they don’t want our debt – it just means they don’t want it at these prices – lower the price and they will be happy to buy – because lower prices equals higher yields. Bingo!

In other words — this isn’t about Kevy Warsh, and the FOMC members anymore. Investors are looking into the future and saying If you want my money for 10, 20 or 30 years — you’re going to have to pay me more and Kevy can’t do a damn thing about it…. the bond market will dictate what happens next - so
Washington better wake up…..

And here’s the problem for stocks: at 4.73%, the 10 yr has gone from 1^st base to 3^rd base and is about to enter the Danger Zone – if we break up and through 4.75% then suddenly 5% doesn’t sound so crazy — and THAT changes the conversation for equity investors.

Higher Treasury yields mean competition for investors’ money, it means higher mortgage rates, higher corporate borrowing costs and higher discount rates. 30 yr mortgages were hovering around 6.6% last week – I suspect we will see them inch closer to 7% before the end of this week, if this keeps up.

And because we don’t live in a vacuum — you have to consider what oil did.

It surged. WTI gained $2.09, or 2.5%, to settle at $84.50, while Brent jumped $2.36, or 2.7%, to settle at $90.87. Yes — Brent is back above $90. This morning, WTI is up another 0.6% while Brent is up 0.1%.

Why? Because hopes for some grand U.S./Iran peace deal took another hit on Monday. The 60-day agreement signed in June expired, and when Trump was asked whether he wanted to extend it, his answer was simple:

No.

Now, Iran didn’t recognize that MOU anyway — arguing that the U.S. had violated its terms weeks ago — so as far as Tehran was concerned, its expiration was largely a non-event.

Then add Oman to the mix. Oman has been working with Iran in an effort to resolve the crisis independently of the U.S., something Trump wasn’t happy with – so he threatened to bomb Oman if they got in the way – raising the temperature further. Remember — Oman is considered a U.S. partner in the region, so when Washington starts threatening them, the tone changes again.

Add continued unrest in Lebanon, increasingly aggressive rhetoric out of Tehran and overnight comments that Iran was going “on the offensive,” and suddenly nobody is pricing in a quick resolution.

Remember what I said yesterday: The risk hasn’t disappeared. Ships are still being attacked, crews have been killed and injured, insurers are taking on enormous risk, and these shipments can be disrupted at any moment.

And here’s the problem: Iran has very little incentive to rush into a deal with Trump right now.

Why would they? Oil is back above $90. The Strait remains constrained. Inflation concerns are building. Global bond yields are rising. And the U.S. midterms are now only about 10 weeks away.

From Tehran’s perspective, they may believe time is on their side. Keep pressure on oil, keep pressure on inflation, keep pressure on the bond market — and ultimately keep pressure on Trump.

Are they betting that American voters will punish Republicans in November, change the makeup of Congress and weaken Trump’s hand? Maybe. But if that is part of the calculation, then dragging this out makes perfect sense.

And here is what investors need to understand- The longer this goes on, the more the oil story becomes a bond story — and the more the bond story becomes a stock-market story. Because $90 Brent is one thing. A 4.75% 10-year is another. Put them together and now you’ve got higher inflation expectations, higher borrowing costs and tighter financial conditions – again, without the Fed doing a damn thing.

And THAT is why I keep coming back to the Danger Zone.

OK – so what did stocks do? They lost ground – and that should not surprise anyone…the Dow lost 272 pts, the S&P gave back 40 pts, the Nasdaq lost 84 pt, the Russell lost 10 pts, the Transports added 52 pts, the Equal Weight S&P ended the day flat, while the Mag 7 lost 460 pts.

Only energy rose…up 1.1% - tech was flat, but the other 9 sectors lost ground…. Communication – 1.9%, Consumer Staples down 1.6%, Consumer Discretionary down 1.2%, Financials lost 1%, Real Estate lost 1%, Basic Materials lost 0.6%, Utilities lost 0.3% while Industrials and Healthcare lost 0.1%.

The contra trades all gained ground – the SH up 0.5%, PSQ up 0.25%, the DOG gained 0.6%, the VIXY +1% (the VIX index rose 6.6%), the triple levered S&P short rose 1.5%.

And gold? Well, the goldbugs took it higher…– gaining $39 to end the day at $4,416 - despite the move higher in long-term yields. And that’s worth paying attention to because it speaks to investors using it as the ‘safety trade’. Investors are using it as protection against geopolitical uncertainty, fiscal deterioration, growing government debt and the possibility that inflation spins out of control.

Recall the $4,150/$4,500 trading range we discussed – well – we’re getting close to breaking out of that…and if we do – then look at $4,750 as the next target. This morning gold is down $26 at $4,390.

Eco data – at 8:30 am we’ll get housing starts and building permits. At 9:15 we’ll get Industrial Production, Capacity Utilization and at 10 am we’ll get Pending Home Sales.

Before the opening – we’ll hear from Home Depot, and they beat and confirmed 2026 guidance. “Customers are focused on ‘smaller projects’ while remaining frozen on large renovations”. The stock is quoted up nearly 2% in the pre-mkt. Remember – it is also a Dow stock.

Overnight – we saw weakness in Japan – 2.5%, Taiwan -1.2% and South Korea – 1.5%. In Europe – markets across the zone are all weaker as well. Italy down 0.7%, Euro Stoxx down 0.6%, France down 0.6%, Germany down 0.4% while the UK is essentially flat.

US futures are mixed - Dow futures are up 10 pts, (thanks to HD), S&P’s -38, Nasdaq down 356 pts or 1.3% while the Russell is down 10. There is pressure on stocks around the world – and Bloomberg says it clearly –

“Stocks fall as long dated bond yields pushed further into multidecade highs and oil prices extended their climb, draining traders’ appetite for risky assets.”

And those long-dated bond yields are NOT uniquely American. Global bonds are repricing the cost of long-term money around the world. Sovereign bonds across Europe are getting hit this morning as investors price in higher inflation risk and the ongoing crisis in the Middle East. 30 yr yields in the UK are at 5.84%, (52 week high), France 4.8% (highest since 2008), Italy – 4.8%, Spain 4.4% (up 11 bps in the past month), Germany 3.8% (up 12 bps in the past month)

The S&P closed at 7745 - down 40 pts. Yesterday it was more consolidation, today it feels a bit more like ‘pressure’. Near term support (not trendline support) at 7700 appears like it’s about to get tested on the opening…. After that – you have to look to the short term trendline which now stands at 7515 as the next level to be tested and based on the chart – it should hold. But, (there’s always a but), if the middle east conflict heats up even more and WTI pushes into the 90’s and Brent into the 100’s – then even 7515 won’t hold.

I’m still in the camp that we could see another draw down as we move into September. If we break the trendline at 7515 – then the June/July lows of 7300 become a reality…. If we went there – it would represent an almost 6% pullback from here…. something NOT out of the question at all and still within what is considered a ‘normal’ trading pattern.