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It is white-knuckle time in the bond market. US Treasury yields have risen sharply since the war with Iran began in February, with the 10-year yield up some \u200b135 basis points to 5.23 percent and the 30-year yield up around 110 basis points from its March low to 5.614 percent. Both are trading at levels last seen more \u200cthan two decades ago.<\/strong><\/p>\n Investors are watching whether bond selling is starting to create its own momentum. Some key technical measures suggest another surge to even-higher yields could be ahead, creating a feedback loop that amplifies the market stress, though there are also reasons to believe that buyers will soon step in, seeking to lock in yields at their most investor-friendly levels since George W. Bush was president.<\/p>\n \u201cPeople in the market are recalibrating their expectations,\u201d said Dustin Reid, fixed income \u200bstrategist at Mackenzie Investments.<\/p>\n Here are four signs that the selling could worsen.<\/p>\n VOLATILITY IS RISING IN RATE OPTIONS<\/strong><\/p>\n Investors are seeking out protection against rising yields, referred to as the \u201cpayer skew,\u201d in the options \u200bmarket. Investors use these markets to insure their portfolios against a sharp move in yields without having to sell their Treasury holdings.<\/p>\n Demand for short-term protection \u2060against a jump in 10-year US swap rates has intensified, pushing the cost of insuring against a 200-basis-point rate rise over the next three months to 132 bps on Monday, highest since the March \u200b2023 banking crisis triggered by the collapse of Silicon Valley Bank.<\/p>\n Swap rates refer to the cost investors pay to lock in a fixed interest rate instead of paying a floating rate.<\/p>\n While options are tied \u200bto swap rates rather than Treasury yields, the two typically move together, making the surge in payer skew an indication of concern about the risk of higher long-term Treasury yields.<\/p>\n Implied volatility, a key input in option prices, has climbed to 21.4 basis points for one-month options on 10-year swap rates, the highest since late March, reflecting growing uncertainty over the path of long-term yields.<\/p>\n CREDIT SPREADS UNDER PRESSURE<\/strong><\/p>\n A major contributor to the selloff has been a surge in corporate issuance to support \u200bthe AI buildout, investors said. Spreads have remained tight, but buyers of longer-term bonds issued by AI hyperscalers are using the Treasury market to hedge their duration risk, a measure of exposure to rising \u200binterest rates \u2014 a practice that lately has spurred selling.<\/p>\n \u201cWhen a transaction prices midday, in the afternoon everyone is selling Treasury futures,\u201d said Neil Sun, portfolio manager at RBC BlueBay Asset Management, who focuses on investment-grade credit. Those \u200cwho aren\u2019t hedging \u2060sometimes sell Treasuries outright to make room for higher-yielding investment-grade bonds.<\/p>\n Goldman Sachs predicts that hyperscalers could sell a record $420 billion in debt next year, which likely means more hedging or selling of government securities.<\/p>\n MORTGAGE HEDGING IS GATHERING PACE<\/strong><\/p>\n Investors exposed to mortgage assets are also hedging against the selloff in Treasuries. As rates rise, the expected life of mortgage-backed securities extends, making them more sensitive to further moves in yields in what is known as duration risk.<\/p>\n Investors often respond by increasing interest-rate hedges to offset that added duration risk, a process known as convexity hedging. That includes selling of Treasury futures \u2014 which can add to selling \u200bpressure across bond markets.<\/p>\n \u201cThe market is carrying a substantial \u200bcohort of mortgages originated over the past \u2060three years at coupons relatively close to current mortgage rates,\u201d said Mike Riddle, chief executive officer at Eris Innovations, a Chicago-based futures and options products developer. He said that could mean still more hedging, adding that nine large trades this month show investors in mortgages scrambling to protect their positions.<\/p>\n YIELD CURVE STEEPENING<\/strong><\/p>\n The renewed \u200bsteepening of the 10-year\/30-year yield curve is another warning, suggesting investors are demanding a greater premium to hold the longest-dated government debt. The 10s-30s \u200bspread widened to about 37 \u2060basis points this week, as the 30-year yield rose faster than the 10-year\u2019s yield.<\/p>\n While the curve has been steeper before, including in late July when that spread reached 52 basis points, the latest move is unfolding with these yields already near multidecade highs. That suggests the move is increasingly reflecting a rising term premium, rather than a broad repricing of the Fed\u2019s policy path. A higher term premium suggests investors are demanding higher \u2060compensation to hold \u200blong-term debt.<\/p>\n \u201cThere\u2019s just more interest in the 10s than the 30s on the part of investors, who see there\u2019s much \u200bmore potential for things to go wrong in the fiscal picture\u201d in the United States over the longer time frame, said Alex Morris, co-founder of fixed income asset management firm F\/m Investments. \u201cEssentially, people are telling the Treasury, \u2018I don\u2019t know if you guys \u200bhave got this under control.’\u201d<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n<\/div>\n