Bonds: The New Toxic Asset?

Markets wrapped up last week on a more subdued note, breaking their recent winning streak. With U.S. elections looming and a wave of earnings reports on the horizon, investors are understandably on edge. But what really stands out is the movement in bond yields. Following the latest Fed meeting, yields on U.S. government bonds have been rising—and fast.

What’s Going On with Bond Yields?

Typically, before the start of a rate cut cycle, you'd expect bonds to rally as investors pile in, pushing prices up and yields down. It is logical to think that yields would move higher after the first rate cut. Investors get excited about the Fed's move and overbuy bonds, followed by a correction. However, this time seems to be different as the rise in yields is very pronounced. So pronounced, in fact, that even mortgage rates in the U.S. have risen, frustrating those buyers who were expecting lower yields in order to buy a home.

Notably, the yield surge has boosted the U.S. dollar. What’s unusual here is that both gold and silver—typically the dollar's counterweights—are rallying alongside it. This rare combination hints that investors are getting uneasy about more than just short-term moves; they might be concerned about the overall health of the financial system.

A Government Spending Binge?

Here's the hypothesis: Investors are waking up to the reality that the U.S. government shows no sign of slowing its spending. Meanwhile, traditional buyers of U.S. debt—China, for one—are taking a step back, leaving the Treasury in a tight spot. To keep attracting buyers, the U.S. Treasury may have to hike yields further, setting off a chain reaction that could upend the market’s stability.

This is reminiscent of the Global Financial Crisis (GFC), with one crucial, and ominous, twist: U.S. government bonds are the bedrock of the entire financial system. And if they’re suddenly perceived as risky, we could be staring down a level of instability that requires unprecedented intervention from central banks. Gold seems to be catching wind of this shift. Crypto markets, too, are watching, poised for potential validation of these fears.