Big, Beautiful Bond Bloodbath

Key Points

• Stock markets fall as fears rise over US fiscal position, volatility rises 

• Bond yields rise, reflecting investor angst over debt and weak US 20yr auction

• BT, easyJet fall on earnings updates 

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It took a day or two longer than I thought but it’s now in progress – stocks are starting to wake up to the strife in bond markets. Trouble has been brewing in the bond market for weeks and now it's spread to the stock market. Worries about the US fiscal position and economy, with Donald Trump's "big, beautiful" tax bill about to be signed that will raise debt and possibly inflation, as well as a weak 20yr auction, pushing bond yields higher. Stocks fell as investors realised this is not a drill – as heard on the floor earlier this week, they will break the equity market to save the bond market. The bond market is starting to flex its intimidating muscle because a) a tax bill will raise debt and b) the US economy is looking wobbly – Conference Board leading economic index fell to its lowest level in 11 years. Although on the plus side the Atlanta Fed's survey of businesses' one-year-ahead inflation expectations turned down this month, to 2.5% from 2.8%. 

Long bonds sold off – no one wants any of this duration risk. The US30yr yield closed at its highest in a couple of years around 5.09%, while the 10yr hit 4.6%. Gold and bitcoin rallied while stocks and the dollar sold off. Investors are pushing back against the tax and spending plans by the US administration – the bond vigilantes are only ever sleeping lightly. This is not just a US problem – we have seen incredibly weak bond auctions in Japan this week too.  

And in the UK we have the same problem – figures today show borrowing was £20.2bn, up £1bn from April last year and the fourth-highest April borrowing figure since monthly records began in 1993. Gilt yields ticked up. Financing domestic bliss and neverending entitlements cannot be sustained forever... 

In a nutshell, after a monster rally from Liberation Day depths to near the all-time highs, equity markets cannot handle yields moving any further out nor the general stress in the bond market - volatility is returning. We have on balance more likely negative catalysts than positive - past peak fear but past peak optimism too.

The S&P 500 closed 1.61% lower at 5,844 and the Nasdaq was down 1.4%, while the Dow lost over 800pts. Target sank 5.2% on weak earnings, while UnitedHealth fell 5.8% on controversy over nursing home payments. Alphabet rose 2.9% after unveiling new AI tools. Tesla fell 2.7% despite Elon Musk confirming plans for robotaxis on Austin roads in June.

Volatility spiked Wednesday – as expected. VIX closed at 20.87 (+15.4%), its highest in two weeks. Short-term measures surged, for example VIX1D +31.5% to 18.07, VIX9D +18% to 19.56. The VIX futures curve went into backwardation - which suggests near-term worries but less angst further out...even with the spike we see the complacency. 

European stock markets turned tail in response to the weakness on Wall St and general declines in Asia overnight. The FTSE 100 dropped about half a percent with similar losses seen in Paris and Frankfurt.  

BT is swimming in treacle – slogging to a 1% rise in earnings on hot competition and – amazingly – weak handset sales. Consumer trends are tough and net adds are a problem - it’s easy to switch and rivals offer faster broadband at cheaper price points. Line losses at Openreach are picking up as Sky starts migrating to the CityFibre network from the middle of the year. Openreach broadband lines fell 243k in Q4, which BT said was driven by losses to competitors and a weaker broadband market. It expects the H2 run rate to continue through FY26...problematic. Decent cost control saw earnings before nasties pick up though and divi increased 2%. For the year to March, BT posted a 1% rise in adjusted EBITDA to £8.2 billion, as cost savings offsetting a 2% fall in revenue to £20.4 billion. Lower handset sales but management raised its target for rolling out full-fibre broadband...shares -4% early doors. 

EasyJet fell after a decent update but seems to be paring losses as the session moves on. All eyes were on the outlook for the summer season, how much capacity is left and the guidance on how the holidays business is driving earnings growth. 

And easyJet seems to have delivered with H1 headline loss before tax was £394 million, a slight improvement on last year when adjusted for the timing of Easter and in line with consensus.  ASK Capacity increased by 12% YoY, in line with its guidance from its Q1 update. It’s also still guiding for ASK growth of c.8% YoY, with less pronounced growth in H2 (+6%) vs H1 (+12%). Holidays guidance also unchanged with 25% growth expected for the year and management says it’s on track with its medium-term target to deliver £1bn in profit before tax. Cost improvement noted - total cost per kilometre (CASK) decreases 5%, with CASK excluding fuel down 4% and fuel CASK down 8%...shares -2% at the open. 

Finally, QinetiQ shares rallied 4% after it secured a £1.54bn extension to its MoD contract for modernizing test and evaluation (T&E) capabilities for future warfare readiness. The announcement came alongside preliminary full-year results detailing a 2% rise in organic revenues. The announcement has helped lift sentiment after a profits warning in March – bad news behind?