Bonds Bludgeoned
Doug Nolan
It was rough.
And I’m not referring to Iran war negotiations or President Trump’s Beijing trip.
The bond rout was global.
“Treasury Buyers Get 5% Long Bond for First Time Since 2007.”
Treasury long bond (30yr) yields jumped 18 bps this week to 5.12%, surpassing the October 2023 gilt crisis spike to the highest yield all the way back to (“still dancing”) July 2007.
Ten-year Treasury yields surged 24 bps this week to a one-year high of 4.59%, the largest weekly rise since the Treasury market “liberation day” dislocation the week of April 11th, 2025.
Two-year Treasury yields jumped 18 bps to 4.07% - the highest level since February 25, 2025.
Benchmark Fannie Mae MBS yields spiked 27 bps to a 10-month high of 5.57% - the largest weekly jump since “liberation day.”
May 15 – Bloomberg (James Hirai):
“UK government bonds tumbled after Manchester Mayor Andy Burnham secured a pathway to potentially challenge Keir Starmer as prime minister, threatening political instability that investors fear could result in more expansive fiscal policy.
The yield on 30-year gilts, the most sensitive maturity to political risk, surged as much as 20 bps to 5.86%, the highest since 1998.
Concerns about high energy costs and inflation also contributed to the move.
Burnham’s announcement that he intends to run for Parliament — a prerequisite to challenge Starmer — put the pound on track for its worst week since 2024 against the dollar.”
It's a formidable list of issues bedeviling the UK bond market.
Thirty-year gilt yields jumped 27 bps this week to close Friday trading at 5.85%, the high back to May 1998 (a few months prior to the Russia/LTCM crisis).
Ten-year gilt yields surged 26 bps this week to 5.17% - the high back to June 2008 (shortly before all hell broke loose).
United Kingdom government debt has expanded to a dismal 150% of GDP – up from 2019’s 85%.
The UK almost appears fiscally responsible these days compared to Japan’s 210% (other sources have Japan debt/GDP as high as 250%).
“Japan Yields Rise to Record Highs on Global Inflation Fears.”
Thirty-year JGB yields traded Friday to 4% for the first time (first issued in 1999) – after a year ago trading to a never before experienced 3% yield.
It was the largest weekly yield spike since the infamous week of April 11th, 2025 (40bps).
Ten-year JGB yields jumped 23 bps this week to 2.72%, the high since June 10th, 1997, and the largest weekly rise since August 22, 2003.
It’s worth noting that the BOJ was compelled to intervene with aggressive bond purchases on August 27th, 2003, after yields spiked from 0.44% in June to 1.44% on August 20th.
Twenty-year JGB yields this week surged to the high since 1996.
In a sign of the times, markets have been fretting UK, Japan, and US bonds more than even Italy, Greece, and France.
But worries increasingly appear systemic.
Yields this week jumped 22 bps in Italy (3.95%), 21 bps in Greece (3.89%), and 20 bps in France (3.86%).
French yields ended the week about a basis point from highs back to 2008.
German yields rose 16 bps to 3.17%, the high back to May 2011 (European debt crisis).
In a curiously atypical dynamic, instability (“contagion”) in the big (“Core”) bond markets gravitated to “developing” (“Periphery”) bonds – especially late in the week.
Local currency 10-year Brazilian yields surged 55 bps this week to 14.44%.
Yields surged 42 bps in Colombia (multiyear high 13.99%); 33 bps in Poland (near multiyear high 6.00%); 30 bps in South Korea (4.21% - high since Nov. ’23); 25 bps in Mexico (9.35%); 20 bps in the Philippines (multiyear high 7.48%); and 124 bps in Turkey (near multiyear high 32.39%).
Cracks even surfaced Friday in what has been of late a rock-solid dollar-denominated EM bond market.
For the week, Colombia dollar bond yields surged 34 bps (7.20%), Brazil 29 bps (6.15%), Mexico 25 bps (6.16%), Turkey 25 bps (7.25%), Philippines 21 bps (5.39%), Indonesia 22 bps (5.41%), and Qatar 23 bps (4.73%).
The iShares Emerging Bond ETF (EMB) lost 1.5% this week, the largest decline since the start of the war.
“Emerging Markets Cap Worst Week Since March on Inflation Fears.”
The South Korean won was slammed 2.4% this week.
The Hungarian forint lost 3.4%, the Brazilian real 3.3%, the Chilian peso 2.1%, the South African rand 1.9%, the Philippine peso 1.8%, the Colombian peso 1.7%, the Polish zloty 1.6%, and the Indian rupee 1.6%.
The rupee’s decline pushed y-t-d losses to 6.4%.
Major EM equities indices were down 5.2% in Indonesia, 4.6% in Turkey, 3.8% in Brazil, 3.1% in Chile, and 2.7% in India.
The iShares Emerging Market Equities ETF (EEM) dropped 4.2% this week, the largest decline since the start of the war.
Friday’s 3.4% was the largest one-day drop since March 3rd.
Panic selling in “Core” U.S. equities it was not.
For the week, Nvidia gained 4.7%, Apple 2.4%, Microsoft 1.6%, and Meta 0.8%.
Amazon did drop 3.1%, with Oracle down 1.5% and Alphabet/Google slipping 1.0%.
After rallying 30% off March 30th lows, the Nasdaq100 slipped only 0.4% this week.
Similar for the Semiconductors: a 70% rally versus this week’s 1.6% decline.
Big tech (equities more generally) would traditionally be sensitive to inflation risk and rising market yields.
Deeply entrenched manias tend to be irrepressible.
Yet it’s no mystery that equities would be content to disregard inflation risk.
The market’s implied Fed policy rate for the December 9th meeting jumped another 13 bps this week to 3.78%, up from the 3.03% level on February 27th.
This implies just over 50% probability of a 25 bps rate increase by the end of the year.
Even 100% odds of a hike would be easily dismissed.
And this is exactly the problem.
The stock market is 100% convinced the Fed would again avoid an actual tightening of financial conditions.
After all, conditions remained loose throughout the Fed’s measured rate increases to 5.25% (to 5.5%).
And despite booming Credit, stock prices, and stubbornly above-target inflation, the Fed reversed course starting in September 2024 – slashing rates 175 bps in 15 months.
Speculative blow-off dynamics were unleashed.
It’s worth noting that most risk/financial conditions indicators moved only marginally this week.
The VIX added just over a point to 18.43, down from a 31.05 March 27th close.
Even more remarkable, high yield CDS dropped nine this week to 315 bps, trading Thursday at the low (304) prior to the start of the war.
This CDS traded to 411 bps on March 31st.
High yield spreads (to Treasuries) closed the week little changed at 267 bps, 10 bps below the pre-war February 25th level.
Again, zero fear of the Fed resorting to so-called “slamming on the brakes” – the type of monetary policy management required to quash well-entrenched inflationary biases.
Instead, it’s more the expectation that inflation and economic overheating will remain constructive for risk assets.
It all appears late-super cycle irrational exuberance.
In a world of liquidity overabundance, these big short squeezes and unwind of hedges stoke liquidity excess.
And with an energized retail trading universe like never before (loving options and leverage), it’s “buy the dip” on steroids.
Throw in the booming leveraged speculating community, and market excess is further fueled by history’s most powerful FOMO (fear of missing out) dynamic.
In short, these are anything but typical speculative melt-up and liquidity dynamics.
From the January 29th high to the March 30th low, the MAG7 index dropped 17.8%.
The index then rallied 29.6% to Thursday’s intraday high – a speculative run for the history books.
May 13 – Bloomberg (Davide Barbuscia, Tasos Vossos and Aaron Weinman):
“Bankers were still putting the final touches on Alphabet Inc.’s blockbuster $17 billion of bond sales when word started to spread Monday morning on Wall Street: the company is already hawking more debt.
This time, it was in yen. Alphabet’s executives had stayed up through the night to get on with Tokyo investors and pitch the deal.
The week prior it had been in euros and Canadian dollars, and, a few months before that, dollars, pounds and Swiss francs.
In all, Alphabet will have raised close to $60 billion by the time the yen sale is finalized, a four-month run that ranks as one of the greatest corporate borrowing binges ever.
Both the sheer scale of the fundraising — quadruple the amount of bonds Alphabet had sold in its first 26 years in business — and the span-the-globe approach it took to pull it off has put the tech giant at the forefront of a race to fund an artificial intelligence buildout expected to cost nearly $5 trillion by the end of 2030.
All told, tech companies have already sold more than $300 billion of debt to US investors to fund AI spending.”
“$300 Billion AI Debt Binge Spreads From Wall Street to Tokyo.”
“Big Tech’s AI Debt Binge.”
“Alphabet Sells Biggest Yen Bond on Record by Foreign Issuer.”
“Big Tech Goes Beyond Wall Street for Huge AI Borrowing.”
“SoftBank $40 billion Refinancing to Lean on Debt, Derivatives.”
“Why Meta’s AI Debt Binge May Enhance, Not Diminish, Bond Value.”
Negative correlations between “big tech” and high-yield spreads/CDS have become a critical dynamic.
The law of large numbers now applies, with an ongoing AI arms race reliant on loose financial conditions.
When conditions tightened and deleveraging lurked during February and March (reflected in surging high yield CDS/widening spreads), the crowded AI trade was under pressure.
But when market reversal, short squeeze, hedge/derivatives unwind, FOMO, and rejuvenated leveraged speculation fomented extreme loosening, it was off to the races.
“The AI bear case is garbage.”
The Bubble case is anything but trash.
At this juncture, extrapolating loose conditions much into the future is risky business.
It’s reminiscent of March 2000.
At March 24th intraday highs, the Nasdaq100 enjoyed y-t-d gains of 30%.
That high would not be attained again for 15 years.
At October 2022 lows, the Nasdaq100’s decline from the high had reached 83%.
Importantly, stocks mounted an extraordinary speculative melt-up in early 2000 in the face of deteriorating industry fundamentals.
By March 2000, massive industry overspending and excess were readily observable.
Telecom debt concerns were mounting, with widening high-yield spreads.
Corporate, MBS, and dollar swap spreads were all widening late in the equities melt-up.
Between February 1st and March 13th 2000, the KBW Bank Index dropped 15% - versus the almost 20% advance in the Nasdaq100.
This performance divergence was a critical warning overshadowed by the manic tech melt-up.
It’s worth noting that the KBW Bank Index declined 1.8% this week.
Bank stocks notably lagged during the rally, and are basically unchanged for 2026, versus strong gains for the Nasdaq100 (15.3%), Semiconductors (63.6%), and the MAG7 (6.7%).
It’s curious to see bank stocks languish in a backdrop of such loose conditions.
Warning of a looming shift in the liquidity backdrop?
In a replay of early-2000, the technology equities melt-up unfolded despite deteriorating fundamental prospects.
I am not disputing that the big U.S. “hyperscalers” and global tech operators have plans to spend gazillions, a historic arms race that will inflate industry earnings until the Bubble bursts.
But this runaway arms race is turning increasingly precarious.
May 11 – Bloomberg (Chris Bryant):
“AI infrastructure costs just keep on rising.
Big tech firms are likely to invest several trillion dollars over the next few years to satisfy your ChatGPT and Claude habit.
But those massive capex bills aren’t just caused by so-called hyperscalers such as Microsoft Corp. and Meta Platforms Inc. building or leasing more and more datacenters.
The price of components going into these gargantuan computing warehouses has gone up, too, forcing some of these companies to splurge more cash than they’d anticipated.
‘Chipflation’ isn’t just a problem for our tech overlords who somehow need to earn a financial return on their investments.
The artificial-intelligence boom is also crowding out supplies of more conventional chips.
When you discover your next smartphone or games console costs far more than the last, blame AI…”
May 13 – Axios (Emily Peck):
“Semiconductors, or chips, are again turning out to be the It Girl of the global economy.
Chips are essential to the AI build-out, and that’s driving a huge burst of demand, creating supply shortages, pushing up prices and creating an investment frenzy.
It also puts chips at the center of geopolitics.
Nvidia CEO Jensen Huang boarded Air Force One Tuesday night, joining the delegation to China…
The stock market is now largely a story about chips.
Since the launch of ChatGPT in 2022, the PHLX semiconductor index, which tracks 30 of the largest companies in the industry, has grown to account for 16% of the S&P 500’s market cap, up from 4%...
It’s hard to overemphasize how weird the chip market is at the moment.
Outside of the pandemic…, typically the price of computing power has trended down.
Now, the frenzied demand for ‘compute’ to power AI has driven up prices throughout the chip supply chain: from the fanciest logic chips to memory chips that store data to older ones that power infrastructure like cars or industrial machinery.”
Prospects that arms race spending will generate outsized returns on investment were already suspect.
And while wild price inflation for chips and AI infrastructure has inflated industry profits and spending plans, sober analysis warns that current dynamics pose a major risk to future profitability.
This is similar to 1999 and early-2000 dynamics, though the scope of today’s global Bubble so dwarfs “nineties” tech Bubble excess.
Moreover, borrowing costs are rising significantly, also at the expense of future profitability.
The incredible scope of AI-related spending has reached the point of fanning general inflationary tailwinds.
And while equities relish the prospect of incessant loose conditions, bond markets suffer heightened anxiety.
May 12 – Bloomberg (Daniel Flatley):
“The US saw a smaller budget surplus in April — a key month for federal revenues — as individual and corporate tax receipts dropped in the wake of President Donald Trump’s signature tax cut legislation.
The April surplus was $215 billion, down 17% from the excess recorded in April the previous year.
Total revenue came in at $837 billion for April, down 2% from a year before…
Individual tax withholdings plus Social Security and Medicare taxes came in at $288 billion, down 6%, while gross corporate levies amounted to $89 billion, marking a decline of 8%.
Spending, meantime, went up in April, thanks especially to higher interest costs…
The Treasury paid $112 billion in interest last month, up 10% from a year before…
For the fiscal year as a whole, the US is expected to see a wider deficit.
The median estimate of primary dealers in US Treasury securities… showed a $1.95 trillion gap for the year ending in September.
Dealers see a further widening to $2 trillion in 2027.”
For a while, the trajectory of debt growth has been viewed by Fed officials and serious economists as on an “unsustainable path”.
But the Day of Reckoning is invariably pushed out to some future period.
Why not now?
The world faces an inflationary shock of uncertain scope and duration.
Deficit spending in the U.S. and elsewhere is out of control.
And the unexpected backup in market yields portends only larger deficits.
Central bank inflation-fighting operations risk a meaningful rise in policy rates and only more pressure on government finances.
Meanwhile, the world is also staring at Trillions of ongoing IA-related borrowing requirements.
“AI’s Global Dash for Cash is Already Straining Credit Markets.”
There are also the many Trillions of speculative leverage that have accumulated throughout Treasury, global government and corporate bonds, and derivatives markets.
Such leverage is premised on confidence that central banks retain the capacity to guarantee liquid and continuous markets.
A confluence of factors, including a new Fed Chair, a split FOMC, and concerns for Fed independence, unprecedented speculative leverage, worsening inflation, and Washington dysfunction, imperils this confidence.
It’s a challenge to envision a market backdrop with greater vulnerability to deleveraging.
A shift away from liquidity abundance and tighter conditions would expose fragilities throughout financial systems and economies.
Clearly, the AI arms race is acutely vulnerable to tighter conditions.
And Friday trading had the appearance of incipient “risk off,” which could easily evolve into serious deleveraging.
That said, we’ve witnessed in previous “risk off” episodes the resilience of “basis trades” and other speculative leverage largely unimpacted by rising yields.
All bets are off if an upside breakout in global yields sparks liquidity fears and market dislocation.
May 14 – Axios (Amy Harder):
“Energy — whether it be oil for cars or power for data centers — is suddenly the world’s biggest constraint.
Energy is becoming the singular driver of both global stability and economic growth.
Oil shocks from the Iran war are rippling through inflation and geopolitics.
The AI boom is triggering a global race for electricity that grids aren’t ready for…
We’re confronting both unprecedented scarcity and demand for energy on a timeline that’s considered remarkably sudden for the usually slow-moving energy sector…
Compared with the same period a year ago, energy costs are up 18%.
Meanwhile, trouble is also lurking in our power lines.
The nation’s grid watchdog took the unusual step last week of issuing its highest level warning that exploding power demand from AI data centers could strain electricity systems.”
May 13 – Reuters (Seher Dareen and Robert Harvey):
“Refinery attacks tied to the wars in Iran and Ukraine have knocked out nearly 9% of global oil refining capacity in recent months, deepening a fuel supply crunch and likely delaying recovery by months after fighting ends.
The Iran war has not only slashed energy supply by disrupting tanker traffic out of the Gulf, but marks the biggest hit to refining since the COVID-19 pandemic in 2020, with damage to facilities and crude shortages forcing cuts in processing.
‘The current tightness will continue to underpin the refined product market,’ Saxo Bank analyst Ole Hansen told Reuters.
‘Not least considering the damage done to refineries.’”
May 14 – Bloomberg (Alex Harris):
“Apollo Global Management Inc.’s insurance arm was the third-largest borrower at the end of March in the Federal Home Loan Bank system, further increasing its holdings since the end of last year.
Athene Holding Ltd. owed $28.2 billion in loans, known as principal advances, to the FHLB as of March 31…
That’s up from the end of 2025, when Athene was the second-biggest borrower in the system with a balance of $23.3 billion.”
May 14 – Bloomberg:
“China’s credit expansion slowed far more than expected from a year earlier in April while banks extended less new loans, underscoring unusually anemic borrowing demand even for a typically slow month for lending.
Aggregate financing, a broad measure of credit, increased less than 630 billion yuan ($93bn) in April…, compared with an expansion of 1.2 trillion yuan a year ago.
That was about half of the median forecast of almost 1.3 trillion yuan…
New loans contracted 15.3 billion yuan in the month, versus a median forecast of an increase of 300 billion yuan.
Chinese households net repaid 786.9 billion yuan, the most since comparable data going back to 2010.”
April is a traditionally weak month for Chinese Credit.
April 2026 was notable and worthy of additional detail.
Consumer Loans (chiefly mortgages) declined a notable $116 billion during April, the largest contraction in data back to 2007.
After four months of the new year, the $77 billion decline in Consumer Loans compares to last year’s $76 billion y-t-d expansion.
Over 12 months, Consumer Loans contracted $89 billion.
This compares to annual expansions exceeding $1.1 TN for both Bubble years 2021 and 2020.
Corporate Loans expanded only $57 billion in April, down from March’s $392 billion and April 2025’s $79 billion.
Year-over-year growth slowed a tick to 8.5%, matching the weakest pace since 2017.
While down about 3% from comparable 2025, the y-t-d expansion of $1.324 TN remained robust.
Certainly not unique to China, government borrowing sustains huge system Credit growth.
China’s $132 billion April increase in government bonds put 12-month issuance at a chunky $1.98 TN.
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