The bond roller coaster ride in September has risen in investors’ minds as the top risk to markets right now.
Bond-market volatility was rattling stocks again on Tuesday, as the 10-year Treasury yield jumped to its highest level in nearly two decades. It rose to 5.04% early in the day before paring that back to around 5%. Major indexes dropped on the move, which comes as the Federal Reserve kicks off its policy meeting that’s widely expected to end with a 25 basis point rate hike on Wednesday.
Bank of America said on Tuesday that investors in its latest survey of fund managers flagged chaos in fixed income as the biggest risk to markets, surpassing other threats like an AI bubble and a second wave of inflation.
“The top tail risk in September is ‘disorderly’ rise in bond yields,” BofA analysts wrote.
While bond yields have surged, the moves might not yet be considered “disorderly.” It took roughly four months for the 10-year Treasury yield to go from 4.5% to 5%, and such a gradual move is thought to be more easily digested than a more sudden spike.
Still, it’s clear that markets have been spooked by the bond swings, and the higher borrowing costs are already being felt by US consumer and businesses.
The moves also point to simmering dissatisfaction among investors about America’s fiscal path.
Carol Schleif, chief market strategist at BMO Wealth Management noted that the Treasury surge suggests that investors aren’t happy with how policy is being crafted, and are selling bonds in response, pushing yields up in the process.
Markets were disappointed in this regard last week when Treasury Secretary Scott Bessent announced a $6 billion bond buyback, which did nothing to stem the rise in yields.
“Even though the rise in bond yields so far this year has been orderly, and it has not happened overnight, these elevated yields could be here to stay for some time, especially with geopolitical concerns and elevated energy prices continuing to remain front and center,” she said.
Others have expressed similar concerns about the risk to broader markets posed by rising yields. Richard Saperstein, chief investment officer of Treasury Partners, predicted on Monday that stocks would not react well if the 10-year treasury rose about 5.25%, particularly if unchecked inflation continues to be the driver.
In Saperstein’s view, the recent moves are likely to compel the Fede to hike rates this week, a view widely shared across Wall Street.
“Rising bond yields are signaling growing concerns about inflation and a widening deficit against a backdrop of a strong economy,” he added. “A warning bell never rings at interest rate tops.”