The bond market is having a wild month. Oil is making things even worse
By John Towfighi, CNN
New York (CNN) — Bonds had a wild week, with yields around the globe spiking to their highest levels in decades. Bond market volatility increased at its fastest pace in over a year. That’s making investors concerned that the turbulence could spill into the stock market.
The bond market’s “fear gauge,” which tracks expected volatility, has surged 30% this week. That’s the biggest one-week surge since April 2025, when President Donald Trump’s “Liberation Day” tariffs roiled global markets.
Investors can adapt to a steady rise in yields, but rapid spikes are harder to absorb. As bond market volatility picks up, it raises concerns about the ripple effects – including the impact to stocks.
Bond yields had been steadily climbing this year before soaring higher on Wednesday after strong economic data, hawkish comments from a key Federal Reserve official and a weak bond auction. Yields extended gains Thursday.
The 30-year Treasury yield rose as high as 5.53% on Friday, its highest level since 2004. Japan’s 10-year yield soared to its highest level since 1996. Bond yields rise when prices fall.
Add in volatile global oil prices trading over $100 per barrel, and it can stir up more uncertainty for investors. “Oil – to use a bad analogy – is throwing gasoline on the inflationary environment, and that’s what has investors worried,” Gennadiy Goldberg, head of US rates strategy at TD Securities, told CNN. “That’s what has the Fed worried as well.”
The 10-year Treasury yield this week hit its highest level since 2007. The key yield sets borrowing costs across the economy. As the yield rises, it pushes up the cost of a mortgage, auto loan and other consumer loans. On Thursday, the average 30-year fixed mortgage rate topped 7%, its highest level in almost two years.
Energy in the driver’s seat
Oil prices remain a key driver for bonds and stocks.
Seven months into the war with Iran, the global oil price is above $100 per barrel — a more than 60% increase since the start of the year — and continues to have major ripple effects through the economy and markets.
Brent crude was volatile this week but is up 15% just this month, pushing up traders’ expectations for central banks to raise interest rates further to tamp down inflation – and pushing up bond yields.
The correlation between oil prices and the 10-year Treasury yield surged this week to its highest level in 35 years, according to data from Cboe Global Markets.
“The longer higher oil prices persist, the more likely inflation spreads to other portions of the economy,” said Mike O’Rourke, chief market strategist at JonesTrading. “That is prompting the Federal Reserve to raise interest rates, which is pressuring bonds.”
A drop in oil prices could ease pressure on bonds, and traders are monitoring developments in the Middle East to gauge whether disruptions to oil flows will persist. A prolonged surge in oil prices so severe it prompts fears of an economic slowdown could also send investors rushing back into the safety of bonds. For now, economic data is strong, oil is elevated and yields are on the rise.
“Oil has … been in the driver’s seat for both stocks and bonds,” Ohsung Kwon, chief equity strategist at Wells Fargo, wrote in a note earlier this week.
Impact on stocks
Investors are on watch for how the bond market tumult is impacting stocks.
The S&P 500 is down less than 1% since hitting a record high five weeks ago. But there’s pain in the market underneath the surface.
Out of the 11 sectors in the S&P 500, only technology and energy have gained this month. The other nine sectors are in the red, led by a more than 7% decline for the utilities sector, which is sensitive to higher interest rates.
The S&P 500 is weighted by market value, so larger companies in the tech sector have a greater influence on the index. The S&P 500 equal-weight index, which gives each stock the same weight, is down more than 5% since its record high in August.
The rise in oil prices and rates is creating headwinds for sectors of the stock market like utilities and consumer discretionary. “It’s been driving parts of the market, most notably the consumer-facing market,” Jonathan Krinsky, chief market technician at BTIG, told CNN.
More stocks in the S&P 500 touched a 52-week low in the past seven trading sessions than stocks hitting 52-week highs, Krinsky said. Oil and rates are being felt in the stock market, just “not quite on the surface of the S&P 500.”
“The AI story has been kind of holding up the S&P,” Krinsky said.
The S&P 500 is up more than 12% this year and has added just over $8 trillion in market value. The tech and communication services sectors have accounted for roughly $6.3 trillion of that market value gain, according to O’Rourke at JonesTrading.
“The ‘Yes, No, Maybe So’ jawboning over the Strait of Hormuz reopening keeps investors on edge,” Craig Johnson, chief market technician at Piper Sandler, wrote in a note, adding that rising bond yields hurt stock valuations and put pressure on small and mid-cap stocks, real estate, utilities and “other rate-sensitive groups.”
The longer that uncertainty over the Strait of Hormuz continues and bond yields keep climbing, the more pressure there could be on the stock market.
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