Four signs it is about to get uglier in the bond market
TLT•US Treasury yields have risen sharply, with the 10-year yield up about 135 basis points to 5.23% and the 30-year yield up around 110 basis points from its March low to 5.614%. Rising rate-option volatility, corporate debt issuance, mortgage hedging and a steeper yield curve could add to selling pressure.
1. Rising volatility
The cost of insuring against a 200-basis-point rise in 10-year US swap rates over three months reached 132 basis points on Monday, the highest since the March 2023 banking crisis. Implied volatility for one-month options on 10-year swap rates rose to 21.4 basis points, its highest since late March.
2. Issuance and hedging
Investors said a surge in corporate issuance to fund AI development has contributed to the selloff, as some bond buyers hedge duration risk by selling Treasury futures or sell Treasuries to make room for corporate bonds. Goldman Sachs predicts hyperscalers could sell a record $420 billion in debt next year. Mortgage investors are also increasing interest-rate hedges as rising rates extend the expected life of mortgage-backed securities.
3. Steeper yield curve
The spread between 10-year and 30-year Treasury yields widened to about 37 basis points this week, as the 30-year yield rose faster. The article says the move, with yields near multidecade highs, suggests a rising term premium; investors are demanding greater compensation to hold longer-dated government debt.
