08.12.25 - Rising bond yields - despite expected Fed rate cut
Over the past trading days, global bond yields have been rising steadily, even as investors continue to price in a Federal Reserve (Fed) rate cut expected this Wednesday.
The move started in Japan, where the 10-year government bond yield is moving closer to the 2% level, a threshold last seen decades ago. From there, pressure spilled into global bond markets.
In the US, the 10-year Treasury yield today nearly touched 4.20%, now hovering around 4.18%. Europe and the UK are showing a similar pattern, with yields moving higher across the curve.
Markets: bond yields rising globally
Bonds: Global yields rising — US 10-year at 4.18%
Equities: Giving up earlier gains
Gold: above USD 4’250/oz on Friday, later slipping back below USD 4’200/oz
USD: Largely unchanged
Cryptos: Volatile and lower — Bitcoin fluctuating between USD 89k to 91k
Volatility: VIX ticking slightly higher
My View: This divergence is drawing increasing attention and raising the question of whether markets are underestimating a growing risk.
Despite widespread expectations of a Fed rate cut on Wednesday, bond yields are rising globally, while equity markets continued to grind higher—at least until the final trading hours.
This creates a clear disconnect.
Under normal circumstances, falling yields support higher equity valuations as discount rates decline and liquidity conditions ease. What we are witnessing now since few days is the opposite: yields rising alongside risk assets, until very recently.
Either bond traders or equity traders are on the wrong side of the trade. Among investors, it is often said that bond markets tend to be ahead of the curve. If that holds true, the current move in yields could be flashing an early warning signal.
One potential catalyst lies in Japan. Years of ultra-low yields encouraged investors to borrow cheaply in yen and deploy capital abroad, a major pillar of global liquidity. As Japanese yields rise meaningfully, and with the Bank of Japan expected to hike rates, that trade becomes significantly more expensive very quickly.
If borrowing costs continue to rise, investors may be forced to reduce leverage at speed, leading to: rapid loan unwinds, reduced global liquidity, pressure on risk assets such as equities and cryptocurrencies.
Liquidity has been the primary fuel behind elevated valuations across markets. Any forced deleveraging, particularly from traditionally stable funding sources like Japan, could lead to sharper, headline-driven market moves.
Volatility could also resurface in bond markets. For that reason, it is crucial to watch yields closely in the coming days. History shows that the bond market often reacts first, posing uncomfortable questions long before equities are ready to answer them.
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