The bond vigilantes are working at full speed:

U.S. treasuries wilted today with the 10-year yield increasing a humongous 15 basis points to 5.13% and the 30-year jumping 9 basis points to 5.41%. (One basis point is 1/100 of a percent).  

Of course, with such a disorderly and sudden jump, the equity markets too lost a percent, which in retrospect looks like a minor miracle. A blowout like this could have been a lot worse.

There were four reasons for this massive drop in treasuries and equities. 

1. The S&P Global’s PMI (Purchasing Manager’s Index) release for the US was enormous this morning and showed that the world’s largest economy is booming. 
2. A Federal Reserve governor made hawkish comments
3. A rebound in oil prices after a drop for the last two days, and a growing realization that there was precious little hope of any settlement with the Iranians.
4. A weak U.S. Treasury auction.

‍From the Wall Street Journal

The selloff in the U.S. bond market has been mostly orderly in recent weeks. Then came Wednesday.

In the morning, a normally unremarkable survey on business activity gave the market a jolt, pointing to surprisingly resilient growth and ongoing inflationary pressures in the economy. Then the selling compounded with each development during the day—fighting words from an Iranian official at the U.N., hawkish comments from a Federal Reserve governor and a weak auction of government bonds. 

It all added up to a perfect storm that drove the 10-year Treasury yield up by the most in a single session since President Trump’s ‘Liberation Day’ tariff rollout rattled markets in April 2025. The 10-year closed at 5.113%, blowing past the recent highs at levels unseen since 2007.”

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I believe that we should monitor the bond market very carefully and not get lulled into complacency:

1. The PMI Index for September

• The manufacturing index It came in strong at 57, overpowering consensus estimates of 55 - the highest since early 2022.
• The services and composite headlines also shot up to 58.7 and 58.4, respectively - 59-month and 62 month highs!
• The employment index too did its bit rising to, hit 55.4, a big thumbs up for payroll expansion the highest since the summer of 2022. 
• New orders jumped from 55 to 58.2, the highest since the Fed started raising rates in March of 2022. 

2. The Federal Reserve governor’s hawkish comments added fuel to the fire. In a speech in Chicago this morning, Federal Reserve governor Michael Barr said that additional interest rate hikes are needed to bring down sticky inflation, which was way above the Fed’s 2% target, and worse risks to achieving this target seemed higher.

3. Oil prices rebounded - I don’t believe that there is a chance for reconciliation, as Brent prices jumped back over $102 per barrel with rhetoric from Irani officials fanning the flames.

4. The treasury auction today for $70Bn 5-year notes was quite weak with dealers holding 16% of the bag, even with higher rates of 5.033% - 3 basis points higher than expectations, clearly a sign of weakness and victory for the bond vigilantes. The treasury secretary’s effort to shore up the bond market doesn’t seem to be working.

I believe that we haven’t seen the worst of the bond market yet and we shouldn’t be lulled into complacency.

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