U.S. Treasury yields rise, diverging from economic expectations as market logic quietly shifts

According to Zhitong Finance APP, in the past, sell-offs in the bond market were typically seen as a signal of a strong economy and often had a positive impact on the stock market. This is because it indicated that investors were more willing to bet on growth, taking on higher risks for potentially greater returns. However, this logic seems to be completely overturned now.

Recently, there has been a widespread sell-off in the global sovereign bond market, catching investors off guard. Although the high debt levels in countries like the United States and Japan are not new, Moody's downgrade of the U.S. sovereign credit rating from the highest level earlier this month seems to have triggered the bond market sell-off.

What truly unsettles investors is the "abnormal" trend of rising yields in this round. Senior currency strategist and economist Jens Nordvig recently pointed out that the traditional relationship between the surge in U.S. 10-year Treasury yields and economic growth expectations has "broken." This means that the current rise in yields is not due to accelerating economic growth but is occurring against a backdrop of significantly weakened growth expectations.

Jens Nordvig stated, "The key issue is not the rise in yields, but rather that while growth expectations are declining, real yields are rapidly surging. This is completely different from past instances where strong growth or a hawkish stance from the Federal Reserve led to rising yields, and this time it is more concerning."

This change highlights bond investors' deep concerns about the U.S. fiscal situation and the lack of political will for fiscal consolidation.

The latest round of rising U.S. Treasury yields coincided with House Republicans passing a new budget proposal put forth by the Trump administration. This bill has further intensified market worries about the fiscal deficit. However, by Thursday afternoon, the market experienced a technical rebound, with investors "buying the dip," leading to an increase in bond prices and a slight decline in yields. The yield on the U.S. 10-year Treasury fell from an intraday high to 4.550%, down 3 basis points; however, the 30-year Treasury yield remained above 5.043%, close to its highest level since November 2023.

On the surface, this volatility may not seem severe, but it reflects a fundamental change in market logic. Nordvig pointed out that under the backdrop of deteriorating growth expectations and the Federal Reserve remaining on hold, the selling pressure in the bond market may continue. This phenomenon completely deviates from the typical "good economy = sell bonds and buy stocks" logic of the past.

If this round of sell-off is indeed, as some analysts say, a "protest action" initiated by the "bond vigilantes" against the U.S. fiscal deficit, then calming market fears will not be an easy task.

Deutsche Bank strategist George Saravelos emphasized that unlike European countries, which can relatively flexibly adjust fiscal policies, the U.S. political system is complex and highly contentious, making the policy adjustment process very slow. In a report, he noted, "Regardless of how the Republican Congress adjusts fiscal policy in the coming weeks, it is likely to become the final form for the entire decade. And as the Republicans may lose their majority after the midterm elections, there is likely to be only one significant fiscal event during this term. After that, the U.S. fiscal path will be difficult to change."In an environment where the bond market dominates sentiment, the stock market's performance is also being suppressed.

Randy Flowers, Senior Portfolio Manager at Intelligent Wealth Solutions, believes that the dominance of the bond market is reshaping the entire market landscape. He expects that U.S. stocks will continue to operate within a "volatile range" in 2025, without significant breakthroughs. "I think bond investors have regained control of the market rhythm. Typically, this situation is bad news for everyone, including the stock market."

This series of developments indicates that the market is entering a new phase of "high interest rates + low growth." For investors, traditional asset allocation logic is facing challenges, and the uncertainty of U.S. fiscal policy and structural changes in the bond market may continue to dominate global financial market sentiment for some time to come