Four signs it is about to get uglier in the bond market as yields rise
TLT•Four market signals suggest U.S. bond selling could worsen: rising rate-option volatility, increased issuance tied to AI infrastructure, mortgage hedging and a steeper 10-year/30-year yield curve. The 10-year Treasury yield rose about 135 basis points to 5.23%, while the 30-year yield reached 5.614%.
1. Rising volatility and issuance
Investors are seeking more protection against rising yields in rate-options markets. The cost of insuring against a 200-basis-point rise in 10-year swap rates over three months reached 132 basis points, the highest since the March 2023 banking crisis; one-month implied volatility also reached its highest level since late March. Separately, corporate borrowing to fund AI infrastructure has prompted some bond buyers to hedge duration risk by selling Treasuries. Goldman Sachs predicts hyperscalers could issue a record $420 billion in debt next year.
2. Mortgage hedging grows
As interest rates rise, mortgage-backed securities can become more sensitive to further yield moves, prompting investors to increase hedges. Those hedges can include selling Treasury futures. Mike Riddle of Eris Innovations said nine large trades this month showed mortgage investors scrambling to protect their positions.
3. Yield curve steepens
The spread between 10-year and 30-year yields widened to about 37 basis points this week as the 30-year yield rose faster. The article says the latest steepening is unfolding with yields near multidecade highs and suggests investors are demanding more compensation to hold longer-dated government debt.
