There’s not much that can pry investors’ attention away from the fireworks in the stock market this year — but a big jump in Treasury yields will do it.
A springtime swoon in the bond market pushed yields on 10-year Treasury notes to nearly 4.7% in mid-May before they settled back to 4.45% by the end of the month. (Prices and yields move in opposite directions.) That’s up from 3.96% before the start of the war in Iran — a big move for bonds.
Yields on 30-year bonds reached nearly 5.2% in mid-May — a level not seen since the summer of 2007 — before closing out the month at 4.99%.
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“We expect the bond market to remain sensitive to geopolitical events, Federal Reserve policy announcements and economic developments, especially around the trajectory of inflation,” says Luis Alvarado, co-head of fixed-income strategy at Wells Fargo Investment Institute.
The bond vigilantes mount up
Bond traders have been reacting to inflation reports showing that price increases are not only persistent but also starting to bleed beyond energy to other parts of the economy.
The government’s release of the April Producer Price Index, for example, which measures inflation at the wholesale level, came in far above expectations, logging the largest year-over-year increase since December 2022.
“Despite another upside inflation surprise, the report mainly confirms that higher energy prices are spreading directly and indirectly to broader prices,” said analysts at BCA Research in a recent note. “Broadening inflation should continue in the near-term,” they added.
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April’s Personal Consumption Expenditures Index, the Fed’s preferred inflation gauge and the first inflation report of new Fed chair Kevin Warsh’s tenure, showed prices continuing to accelerate.
When they sell off Treasuries on bad inflation news, so-called bond vigilantes are sending a clear message to the Fed and its new chair, says market strategist Ed Yardeni, of Yardeni Research (who coined the “vigilantes” moniker for disgruntled bond traders back in the 1980s).
“Bond vigilantes don’t believe lower rates are the right course,” he says. “They’re taking charge here.”
Indeed, the expectation of Fed easing this year has swung sharply and rapidly to a more hawkish view. At the start of May, more than 90% of traders expected the Fed’s benchmark rate target to hold steady at 3.50% to 3.75% or be a quarter-point lower by year-end, according to CME Group’s FedWatch tool. By May 31, nearly 44% of traders expected the federal funds rate to go higher — most thought by one-quarter of a percentage point, but a few by as much as three-quarters of a point.
How should investors prepare for higher bond yields?
Investors should brace for more yield volatility and stay agile, says WFII’s Alvarado. A jump in 10-year yields well above the 4.75% level boosts the attractiveness of long-term maturities, he says; a drop below 4.25% favors shorter-term IOUs.
But focus more on clipping your coupons. “We think the income component of fixed-income should remain a key driver of total return for investors in 2026,” Alvarado says.
So far, the stock market has remained largely impervious to the intermittent mayhem in bonds, though rate-induced pullbacks are possible.
“Higher rates do not derail bull markets when growth remains strong,” says Ulrike Hoffmann-Burchardi, chief investment officer, Americas, at UBS Financial Services, “though there can be short-lived drawdowns when the market adjusts to a higher-rate environment before getting back on its uptrend.”
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