Two-Minute Market Focus: Rising Treasury Yields Put Bond Market Volatility in Focus

Key Takeaways

• Commodities gained 22.4% over the past 90 days, while the S&P 500 rose about 3.6%; international developed stocks, bonds, and small-cap stocks declined.
• The five-year Treasury yield reached 5%, while real yields rose to some of their highest levels in many years, reflecting concerns that extend beyond inflation.
• Rising bond market volatility alongside relatively contained equity volatility suggests stocks could face additional volatility if bond markets remain unsettled.

Commodities Lead as Bonds and Small Caps Decline

Over the past 90 days, commodities led market performance with a 22.4% gain, while the S&P 500 rose about 3.6%. International developed stocks declined 0.39%, the bond market fell 3.4% and the Russell 2000 Index dropped 5.1%. Although several factors contributed to these moves, the bond market has drawn particular attention as yields have climbed.

Higher Real Yields Point to Broader Market Concerns

The five-year Treasury yield reached 5%, a level not seen since around the global financial crisis. More notably, real yields—the five-year yield adjusted for inflation—have risen to some of their highest levels in many years. 

This suggests yields are being driven not only by inflation pressures but also by concerns about federal deficits, the overall level of U.S. debt, and the additional risk premium investors may be demanding. These moves do not necessarily signal concerns about the U.S. Treasury’s ability to meet its obligations, but they show the issues weighing on the market.

Bond Volatility Signals a Potential Risk for Stocks

The MOVE Index (Merrill Lynch Option Volatility Estimate), which tracks bond market volatility, has begun rising again after easing from the elevated levels seen in 2022 and early 2023. At the same time, the VIX, a measure of equity market volatility, has remained comparatively subdued. 

This disconnect suggests that the equity market may not yet be reflecting the same level of concern as the bond market. If Treasury markets remain unsettled, stocks could experience additional volatility in the months ahead.

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