What is the market saying? While the Nasdaq is soaring, U.S. Treasury yields are approaching highs, and the dollar is declining

The temporary suspension of tariffs between China and the U.S., combined with a cooling of U.S. inflation, has triggered a significant rise in U.S. stocks; however, the performance of the bond market and the dollar reveals deeper market concerns.

On Tuesday, a puzzling scene unfolded in the U.S. market: U.S. stocks rebounded, tech stocks continued to soar, while U.S. Treasury yields rose abnormally despite slowing inflation, and the dollar further weakened.

Data shows that the U.S. Consumer Price Index (CPI) rose 2.3% year-on-year in April, lower than economists' expectations of 2.4%, marking the lowest level since February 2021. This should have been good news for the bond market, but the yield on the 10-year U.S. Treasury rose by 2.4 basis points to 4.481%.

Moreover, the correlation between the dollar and U.S. Treasury yields has been strong for many years, but recently there has been a divergence.

Analysts believe these signs indicate that the rebound in U.S. stocks may only be a superficial celebration, and the abnormal rise in Treasury yields, along with the divergence from the dollar's trend, points to structural fiscal issues in the U.S. or suggests deeper risks of a dollar collapse. With the U.S. government expected to issue over $2 trillion in Treasury bonds, a lack of buyers may force the Federal Reserve to restart balance sheet expansion.

Stock Market Celebration, but the Bond Market Tells a Different Story

U.S. inflation may be cooling, but it has failed to soothe the bond market, with Treasury yields stubbornly rising.

Analysts believe this is because April's inflation has not fully reflected the impact of tariffs, and the core inflation rate, excluding food and energy, remains at 2.8%, in line with expectations, which may weaken market expectations for a rate cut by the Federal Reserve this year.

Additionally, although the temporary suspension of tariffs has brought good news to the market, the sustainability of this boost is in doubt.

Michael Brown, senior research strategist at Pepperstone, stated that despite the relatively positive news on Monday, it demonstrates the "tumultuous and chaotic nature of U.S. policymaking." He added that this is a factor that has been "eroding the credibility of U.S. institutions and the safe-haven value of assets in recent weeks."

And despite the suspension of tariffs, the impact on the economy has already occurred.

Vasu Menon, managing director of investment strategy at OCBC, stated that Trump's 10% general tariffs and the unpredictability of trade policies may harm the U.S. economy and corporate sector in the coming months. While a recession remains uncertain, a significant slowdown in the U.S. economy is almost certain.

Stephanie Pomboy, founder of MacroMavens, pointed out the market's blind spot in a media interview: "Listening to financial media, you would think this is a final agreement, but that is not the case." While the stock market is celebrating, the bond market is sounding the alarm What is even more concerning is that with over $2 trillion in U.S. Treasuries set to be issued and major foreign buyers withdrawing, Pomboy raised a sharp question: "Who will buy $2 trillion worth of bonds?"

According to the latest forecasts, the U.S. Treasury plans to borrow $514 billion in the April to June quarter of 2025, $554 billion in the July to September quarter, with borrowing amounts in previous quarters also roughly similar, resulting in a total borrowing amount exceeding $2 trillion on an annualized basis, which is an astonishing figure.

Pomboy warned that the Federal Reserve may ultimately have no choice but to expand its balance sheet again. "The Fed is the only obvious candidate to absorb all this Treasury issuance," she said, adding that although credit spreads have not reacted, credit pressures are increasing.

"This is a structural fiscal problem," she concluded, "the market is celebrating tariff issues, but the foundation is crumbling."

Decoupling of the Dollar and Bond Yields: Prelude to a Systemic Crisis?

A particularly disturbing signal is the break in the traditional correlation between the dollar and U.S. Treasury yields. Typically, when yields rise, the dollar should also strengthen, but this connection is now breaking down.

Bravos Research points out that this phenomenon indicates that interest rates must rise further to stabilize the dollar, the dollar may face a real risk of a deeper collapse.

Analysts at EndGame Macro noted: "The market no longer views rising U.S. yields as a signal of strength or policy control, but rather as a signal of crisis. This fundamentally changes the dollar's response to yields."

This abnormal phenomenon suggests two possible outcomes: either the Fed is forced to quietly implement easing through a "backdoor" to regain control (which could further weaken the dollar), or a rupture occurs somewhere in the international market, forcing foreign capital back to the U.S. and pushing up the dollar. However, the latter scenario does not represent confidence in the U.S. economy; rather, it would confirm the fragility of the global financial system.