US Stock Summer Rally Faces Turbulence as Treasury Yields Surge

Barron's Weekly reports that the summer rally in US equities is facing a critical test from the bond market. US Treasury yields surged on Tuesday, with the 10-year yield briefly touching 4.73%, approaching an 18-month high; the 30-year yield rose to 5.275%, reaching levels last seen before the 2007 global financial crisis. As borrowing costs climb, the upward momentum in US stocks is being restrained, making the bond market one of the most significant risks to watch over the coming months.

The immediate trigger for the sell-off in US Treasuries was the renewed rise in oil prices.

Escalating tensions in the Persian Gulf, renewed Houthi attacks in the Red Sea, the collapse of peace talks, and the prolonged disruption of shipping through the Strait of Hormuz have raised concerns about sustained disruptions to Middle Eastern energy supplies. As a result, international benchmark Brent crude oil prices broke above $90 per barrel, the first time since late July.

Higher oil prices not only increase energy costs for businesses and consumers but also prompt the market to reassess US inflation and Federal Reserve policy outlook.

The CME Group's FedWatch tool shows the probability of a Fed rate hike in September has risen to about 52%, up from just over 40% following the July employment report.

Achilleas Georgolopoulos, Senior Market Analyst at Trading Point XM, noted that while weak US employment data initially boosted market optimism, the persistent rise in oil prices and Treasury yields has quickly eroded bullish momentum in US equities. Investors are concerned that higher energy prices could push inflation higher, forcing the Fed to hike rates, while also worrying that high interest rates and elevated oil prices could slow economic growth.

The bond market was already under multiple pressures, including expanding US government debt, rising fiscal deficits, and inflation risks from Gulf conflicts. Now, oil prices returning to elevated levels have further amplified market concerns about long-term inflation and interest rates.

The US 10-year Treasury yield has risen more than 10 basis points over the past week and has climbed over 75 basis points since the outbreak of war in late February.

Geopolitical uncertainty continues to rise.

On Monday evening, President Trump stated that any future negotiations with Iran would require Tehran to compensate American personnel and other victims. Trump's remarks respond to Iran's demand for war reparations from the US and highlight the significant divergence between the two sides on ceasefire terms.

Markets will now focus on the July inflation data to be released by the US Bureau of Labor Statistics. Market expectations suggest the overall Consumer Price Index (CPI) will rise 0.1% month-on-month, a sharp rebound from the previous month's decline of 0.4%; the year-on-year rate could reach 3.4%. If inflation pressures exceed expectations, it could further increase the likelihood of rate hikes and push Treasury yields even higher.

Chris Turner, Global Head of Markets at ING, believes investors may be able to absorb rising inflation and could even accept a September rate hike by the Fed. However, the performance of long-dated Treasuries remains the biggest market variable. With yields already near recent range highs, and technology firms planning large-scale bond issuances, bond supply pressure could intensify further.

This implies that the continuation of the summer stock rally may depend not only on corporate earnings or economic data but also on whether the bond market can stabilize. If US Treasury prices continue to fall and yields keep rising, high-valuation tech stocks and the broader equity market could face greater correction pressure.