US stocks delivered a mixed opening on Tuesday, with the Dow Jones Industrial Average climbing 0.36% and the S&P 500 up 0.06%, while the tech-heavy Nasdaq slipped 0.05%. The muted start came as treasury yields continued their relentless ascent, adding to concerns that rising oil prices could re-ignite inflationary pressures.

Among the notable movers, Dell Technologies surged 8.60%, while NetApp and CBRE Group Inc Class A gained 2.39% and 2.35% respectively. United Continental Holdings added 2.27% in early trading. On the downside, Palo Alto Networks dropped 5.73% and PG&E Corp fell 4.62%. In the "Magnificent Seven" group, Nvidia rose 0.80%, Apple advanced 0.78%, Tesla climbed 0.77%, and Meta Platforms was up 0.73%. Meanwhile, Alphabet, Amazon, and Microsoft declined 0.27%, 0.48%, and 0.85% respectively.

The benchmark 10-year US Treasury yield surged to 4.814% during the session, marking its highest level since November 2023. Yields on UK, German, and French government bonds also advanced in tandem, while Japan's 10-year yield remained near multi-decade highs.

Across the Atlantic, Europe's pan-continental Stoxx 600 index slipped 0.49% as major European bourses closed broadly lower. The UK's FTSE 100 and France's CAC 40 each dropped nearly 0.6%, Italy's FTSE MIB lost 0.5%, and Germany's DAX declined 0.7%. In the Asia-Pacific region, Japan's Nikkei 225 plunged 2.85% at the close, South Korea's Kospi tumbled 4%, Australia's S&P/ASX 200 fell 0.97%, and China's CSI 300 index ended 1.38% lower.

Where the pressure is building

Thierry Wizman, global FX and rates strategist at Macquarie Group, noted that "rising yields are becoming a drag on equities. Higher yields force analysts to apply more aggressive discount rates to earnings expectations, which in turn compresses price-to-earnings multiples." The latest surge in energy prices has intensified fears that inflation will remain stubbornly elevated. At the same time, bonds are facing significant supply pressure from massive government spending and corporate financing needs, prompting investors to demand higher yield compensation.

Fed rate hike expectations are now firmly back on the table, with traders pricing in more than 50% odds of a hike by each of the three major central banks this month. For the Federal Reserve specifically, the probability of a September hike is approaching 70%. Chris Turner, an analyst at ING, commented: "The new base case appears to be that the Fed will eventually raise rates in September. Fed Chair Kevin Warsh has been quite clear that inflation is not returning to target fast enough, and with the economy still relatively strong, the Fed needs to act."

Patrik Lang of Global Gate Asset Management observed that while equity markets remain relatively calm for now, "this calm is likely to change once US and Japanese treasury yields break through their current resistance levels." He added: "Market positioning is somewhat crowded right now, and short-term indicators are in overbought territory. Regardless of the fundamentals, these factors point to a potential consolidation phase in the coming weeks."

Sovereign debt under siege

The violent sell-off in the bond market carries significant implications for global asset pricing. Rising financing costs mean higher mortgage rates for consumers and tougher fiscal choices for governments as their borrowing expenses climb. The US 10-year yield has now climbed to 4.81%, near three-year highs, and any move toward 5% could intensify already-jittery stock market sentiment. The 30-year Treasury yield remains elevated at around 5.29%, close to the 19-year high touched earlier after Treasury Secretary Scott Bessent expanded the bond buyback program to curb long-term borrowing costs.

Bond prices fell across Europe and Asia. Japan's 10-year yield held above 3%, marking a 30-year high, while Australia's 10-year yield jumped to 5.198%, its highest level in more than 15 years. German bund futures dropped 0.35% to their lowest since 2011, and French OAT futures fell 0.37% to an all-time low.

Charu Chanana, chief investment strategist at Saxo Bank, said bond investors are increasingly demanding higher risk premiums to compensate for inflation risk, fiscal risk, and the supply pressure from a flood of new debt hitting the market. "This suggests the bond sell-off could become overextended, and the probability of the US 10-year yield rising to 5% is increasing, until yields become attractive enough to lure buyers back in," she said.

The persistent bond rout comes as the G20 finance ministers meeting concluded Tuesday in North Carolina. Despite Treasury Secretary Scott Bessent's remarks at the summit that Gulf crude could bypass the Strait of Hormuz within two years, oil prices continued to climb.

Skylar Montgomery Koning, macro strategist at Bloomberg, identified four forces driving yields higher: "recurring supply shocks, rising commodity prices, massive capital demand, and higher neutral rates and term premiums. In the short term, commodity price pressures mean the path back to stable inflation is not going to be easy. For bonds to truly rebound, you would likely need either an easing of geopolitical tensions or a marked weakening in economic growth."

Investors are increasingly betting on a Fed rate hike at this month's meeting, which is further pushing yields upward. According to LSEG data, markets currently price a 69% probability of a September rate hike. Concerns that rising oil prices could reignite inflation are driving yields higher. WTI crude futures have seen significant volatility this week, with prices remaining elevated as geopolitical risks persist.

JPMorgan says debt market can absorb the issuance wave

With tech giants launching a wave of bond issuance to fund AI data center buildouts, concerns have emerged over whether the US investment-grade bond market can absorb the growing supply. However, Stephanie Aliaga, global market strategist at JPMorgan Asset Management, believes that hyperscale cloud companies currently maintain low leverage levels, and strong AI computing demand supports future cash flows, meaning the bond market is fully capable of absorbing the new issuance. JPMorgan estimates that the six major hyperscale cloud providers could add approximately $1.5 trillion in additional debt without significantly straining their financial positions. These six companies now account for about 5% of the US investment-grade bond index, double the proportion from two years ago. As AI infrastructure investment continues to expand, these tech giants' influence in the global bond market is rising rapidly.

September's unnerving calm

September is historically one of the most volatile months for the stock market, yet current conditions show no typical signs of weakness. The S&P 500 remains near record highs and sits comfortably above its 200-day moving average, making a sharp September decline less likely than the historical average would suggest. Ari Wald, head of technical analysis at Oppenheimer, noted that while the S&P 500 has not continued its rapid advance recently, there has also been no "major breakdown." From a technical perspective, the risk of forming a significant market top remains lower than historical averages.

Relying solely on the "September is the worst month" seasonal pattern is insufficient for judging this year's trajectory. More critical than seasonal patterns are volatility levels, bond yields, and Fed policy. With the second-quarter earnings season for S&P 500 components nearly complete, the dominant market drivers in September will shift back from corporate results to the macro environment. Jack Janasiewicz, multi-asset portfolio manager at Natixis Investment Managers, believes that inflation, Fed policy, and bond yields will be the primary variables influencing markets in the weeks ahead.