The global bond market has been in focus for two weeks. Government debt selloff pushed yields higher. Traders fear inflation from surging oil prices amid the Middle East conflict.
Market participants expect central banks to hike rates. The Strait of Hormuz closure caused the biggest oil supply disruption. Investors shy away from government debt.
Japan's 10-year yield hit levels not seen since September 1996. Its 30-year yield hit a record. The UK 30-year gilt reached levels not seen since 1998. In the US, the 10-year yield hit a one-year high, while the 30-year yield climbed to levels not seen since 2007.
Goldman Sachs analysts highlight the historic link between equities and rates. "While equities are near all-time highs and rates elevated, the daily correlation has rarely been as negative," they note.
Five reasons are given: yield level, speed of advance, relative stock valuation, late-cycle dynamics, and growth expectations. "Higher yields increase fragility. In the US, 10y yields at 4.6% have historically coincided with negative equity-rate correlations," analysts say.
The 10-year yield rose about 25 basis points in the past month. That is above the historical trend. Equities typically underperform when bond yields move more than 20 basis points over a month.
High equity valuations provide less buffer against higher rates. The market's ability to absorb discount rate increases is reduced. Sensitivity is highest in late-cycle phases.
"Today's environment—persistent inflation, resilient growth, elevated valuations, and optimism around AI—bears hallmarks of a late-cycle phase. Markets are more vulnerable to policy or rate shocks," analysts say.
"The Middle East conflict has been interpreted as an inflation shock, not a growth shock. Equities are negatively correlated with short-term inflation. Correlation with long-term inflation remains positive," they add.
