If the bond market had a social life, it would be canceling brunch and texting, “We need to talk.” Once the boring uncle of financial markets, bonds are now hosting more drama than some ‘celebrities-on-a-yacht’ TV series. With junk bonds popping and Treasuries tanking, it’s should be enough for you to sit up and say, “Huh, that’s interesting.”
For decades, bonds — particularly US treasuries — served as the reliable ballast in large institutional investor portfolios, anchoring them through equity storms and geopolitical typhoons. But as we crossed into late 2024 and early 2025, the bond market is sending signals that something is deeply out of sync. Last year, spreads on investment-grade and high-yield debt had compressed to multi-decade lows, a technical and psychological level that historically precedes market stress, a level from which they’re rising now. On the other hand, Treasury yields have in the last handful of weeks “popped” significantly, not because of growth or inflation fears, but due to a lack of confidence in the US — both domestic and global.
High-yield bonds, commonly dubbed “junk,” have staged an impressive rally since 2022, and their yields (a measure for the risk associated with them) dropped consequently. The distance of their yield above the yield of the (at least once) much safer 10year treasury bonds, known as their “spread”, had narrowed down to levels unseen in nearly 20 years – signaling perceived risk in crap corporate debt to be almost akin to government debt. But beneath the surface, cracks are forming. When JNK — the flagship high-yield ETF — hit a short-term top in October 2024, it wasn’t just a blip. Spreads have widened since considerably, preceding and accompanying the recent volatility rout in equities.
Spreads can widen significantly, as you can see below in the chart comparison to the 2007/8 financial crisis. So far, they only perched up a little, though significantly … and every large blow-out of junk spreads once started as a small rise, such as the one were seeing now.
This movement reflects stress. Historically, such setups precede major risk-off moves, particularly when complacency in spreads meets rising systemic volatility, as we started to witness with equity volatility over the last few weeks.
In normal times, lower inflation and weak macro data — such as the latest soft 2.4% CPI print, and deteriorating consumer sentiment such as the UoM consumer gauge being at a 45 year Low — would support bond prices. But we’re not in normal times. Treasuries recently experienced their largest weekly yield spike since 2001. Liquidity dried up, with market depth running 80% below average. When tiny trades move markets like tsunamis, you’re not looking at a functioning system. It’s dysfunction in high-def, and traders know it.
Much of this instability links back to geopolitics — specifically, tariff threats and erratic policy communication from the White House. The late trade salvos spooked foreign holders of Treasuries, including China and Japan, prompting them to dump U.S. debt. In the case of China, this dumping might have been intentionally to put stress on the White House. The result? A bond market that no longer behaves like the safe haven it once was. As bond traders of big institutions comment, this selling appears different, much like methodical dumping.
To boot, just before the tariff explosion and for the first time in decades, the dollar, equities and treasury yields fell alongside. That’s a dynamic not seen often, as the dollar typically strengthens during times of risk-off upheaval in equities.
With risk indicators spiking across asset classes, we might again witness Fed intervention soon — not for QE, but bond buying to ensure basic liquidity and market functionality. If recessionary pressures resurface and liquidity stays scarce, high-yield and other corporate bonds could reprice with shocking speed, especially if the Fed is boxed in by politics and inflation optics.
As capital flees appears to start fleeing, it’s triggering something worse than just short-term volatility: a questioning of U.S. financial credibility. If you’re a sovereign wealth fund or pension manager abroad, how do you allocate into a market where policy whiplash can wipe out bond value quickly?
The bond market appears to have entered an existential crisis, and it’s dragging the dollar with it. Once a global haven of stability that even attracted capital during the financial crisis, treasuries now react like caffeine-addled meme stocks. But if you feel like the markets don’t make sense anymore, you’re wrong – they’re just reacting to the madness.
What happens next has the potential to be resolved professionally without further hurt … but it can also develop into something much more sinister and ugly. It all depends how the reigning powers choose to behave.
