Beware: the bond market is signalling troubles ahead Beware: the bond market is signalling troubles ahead Beware: the bond market is signalling troubles ahead

Beware: the bond market is signalling troubles ahead

Althea Spinozzi

Senior Fixed Income Strategist

Summary:  It's time to turn cautious as the bond market is signalling a swift rise in interest rates amid strong inflationary pressures and more aggressive monetary policies. So far, risky assets have suffered due to a rise in interest rates. However, things can quickly turn for the wort as corporate spreads begin to widen as financial conditions tighten. As the Federal Reserve prepares to hike interest rates, we expect breakeven rates to drop and real yields to accelerate their rise, posing a threat to risky assets. Nominal yields will continue to rise, too, as they already point to much higher levels we have seen this year. Given the market volatility, we don't exclude seeing 10-year TIPS yields rising to 0.5% and 10-year nominal yields to 2% by the end of the year.

Investors should start to worry about their investments as there are signs of US Treasury yields moving higher, dragging with them lower-rated credits.

HYG, the iShares iBoxx High Yield Corporate Bond ETF, has broken a key support level at 86.5. Moving averages are all dropping in a sign that the ETF could further fall. Once the weak support line at 85.7 is broken, the ETF will likely continue its fall to 84.8. 

Source: Bloomberg and Saxo Group.
Don't jump to conclusions. The current drop in HYG and JNK (the SPDR Bloomberg High Yield Bond ETF) has been driven entirely by the recent rise in yields. Indeed, while the average yield to worst of US Corporate junk bonds has risen to 4.6%, the highest level since December 2020, their option-adjusted spread (OAS) remains around 300bps. That's in line with the level seen before the 2008 global financial crisis. It means that the JNK and HYG are falling due to a rise in interest rates and not because there are signs of distress in the weaker corporate bonds space. While with individual bonds, one can mitigate the risk of rising interest rates by holding the bond until maturity, it's impossible to do so with ETFs because there is no maturity date for these products. It highlights that amid an environment of high inflation and rising interest rates, it's essential to search for yields removing as much duration as possible. The junk bond market can provide for that, but it's critical to be prepared to hold those bonds until maturity.
Source: Bloomberg and Saxo Group.

The problem is that the higher US Treasury yields soar, the more pressure will be applied on weaker bonds, ultimately causing credit spreads to widen. At that point, it will be too late for risky assets as volatility will become endemic in both the bond and stock market.

One way to know when we might face a broad selloff is to monitor real yields. The faster they rise, the quicker financing conditions are tightening for the corporate space. Real yields remain well below zero. However, as the Federal Reserve prepares to tighten the economy, we can expect breakeven rates to fall and nominal yields to rise, accelerating the rise in real yields. That could provoke a deep selloff, not only within the junk bond space but also in stocks with high duration, such as tech stocks. That's is what happened amid the Taper Tantrum in 2013.

Source: Bloomberg and Saxo Group.

Therefore, it is vital to monitor the movements of both real and nominal yields. Below, we are going to highlight some critical levels.

Real yields

Ten-year TIPS have traded rangebound since August. However, if they break above their descending trendline, they will likely rise to test resistance at -0.70%. If interest rate hikes accelerate by the end of the year, we can expect real yields to rise to -0.50%. Partly, valuations will continue to be supported by negative real yields. Still, repricing will be inevitable due to the fast rise of real yields.

Source: Bloomberg and Saxo Group.

Nominal yields

Ten-year US Treasuries are trading in an uptrend. Yet, we expect them to remain in check until the debt ceiling crisis has been resolved, as they will serve as a safe haven amid volatility in money markets. At that point, they are likely to break above 1.75% and continue to rise to 2% amid inflationary pressures and more aggressive monetary policies.

Source: Bloomberg and Saxo Group.

Five-year yields are also trading in an uptrend towards 1.50%.

Source: Bloomberg and Saxo Group.

Two-year yields are likely to accelerate their rise as the market prices earlier interest rate hikes. Yields broke resistance at 0.55%, and they are now in a fast area which could take them quickly to 1%.

Source: Bloomberg and Saxo Group.

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.