Equities may be inclined to sustain a rebound from their late-summer swoon, and the odds may favor a Q4 rally on Wall Street, but a lot hinges on bonds, and specifically long-end US yields.

Just prior to Thursday’s 30-year sale, I noted that stocks were able to shrug off a warm CPI report (on the heels of a warm PPI release the prior day) in part because bonds didn’t react violently to the data. Not that the figures called for a violent reaction. The numbers hardly counted as disastrous in the context of the pandemic-era inflation regime, but the CPI update did suggest markets might’ve been too eager to price out a November rate hike in light of recent Fedspeak.

I mentioned the 30-year auction in the linked article to cover myself — there was a good chance it’d tail. Demand was tepid at both the three- and 10-year sales this week, an inauspicious setup for Thursday’s supply. Sure enough, the long bond sale tailed, and not by a little either: 3.7bps. The non-dealer bid, at 81.8%, was well below average.

And just like, what was a relatively pedestrian (i.e., by recent, volatile standards) long-end selloff turned into a double-digit mini-rout.

30-year yields rose as much as 15bps in the wake of the ugly auction. Equities tailed off (bad pun alert). Small-caps, which were already underperforming woefully, fell more than 2%.

Such are the perils of a market beholden to bonds at a time when investors are still refining macro and fiscal narratives in search of a long-end lodestar. Or r-star.

The long-end is where the action is, and the late-cycle bear steepener hasn’t been kind to equities, driven as it is by a fairly dramatic term premium repricing. The reals-led nature of the August-September bond rout was likewise distressing for stocks which still trade on a multiple that many argue is inconsistent with new macro realities.

I included the figure above in the latest Weekly. It’s updated through Thursday. It illustrates the extent to which the fireworks migrated out the curve.

Beleaguered long-end Treasury ETFs mired in unthinkable drawdowns were (note the emphasis) on track for their best week since March. Thursday’s selloff had the potential to derail the bounce.

“We’re skeptical investors’ latest attempt to reintroduce term premium into the long-end of the curve has run its course given we still haven’t received clear fundamental confirmation via the hard data the real economy is slowing,” BMO’s Ben Jeffery said on Thursday afternoon. “While the firm read on CPI didn’t necessarily call into question the effectiveness of the Fed’s inflation fighting tools, it [didn’t] create a definitively bullish Treasury backdrop” either, he added.

If you hang on my every word… well, first, God bless you for that. But second, you’ll recall that I repeatedly warned this week on the risk of a false dawn for besieged bonds. In fact, I even used “false dawn” in a headline on Tuesday.

It was very difficult this week to disentangle what part of the nascent duration bid was attributable to a flight-to-safety associated with the Mideast drama and what part was down to Fedspeak which suggested the Committee is now very open to the idea that the implied FCI tightening from the long-end selloff could stand in for the final rate hike tipped by the dot plot.

Unless and until there’s war spillover beyond Gaza, the flight-to-quality bid probably isn’t sustainable. Or at least not in the absence of a material worsening in the US macro data. Meanwhile, the September CPI report added back a bit of the rate hike premium which disappeared into recently dovish Fedpseak. The poor long bond sale was apparently a bridge too far for the nascent (there’s that descriptor again) bond rebound.

Starting Friday, equity investors’ focus will shift to earnings. But coming full circle, I want to reiterate: A Q4 rally for stocks depends heavily on a well-behaved US long-end. Equities have resisted and resisted this year in the face of stubbornly elevated real yields, and stocks even managed to avoid a serious breakdown in the face of a sharp term premium repricing. I suppose it’s possible that a strong reporting season for corporate America could offset a renewed bout of bearish price action in bonds, but I doubt it.

One possible savior could be a mix shift from Treasury that forces a rethink from bears betting on the oversupply narrative. Janet Yellen may “slow the pace of terming out” debt in response to the increase in the term premium and strong T-bill demand, Barclays suggested. “We believe such an outcome is likely to be perceived well by the markets” given that investors “have been wondering who will buy all the long-dated Treasurys,” the bank said, adding that “lower duration supply than feared should assuage” market concerns.

Nomura’s Charlie McElligott called that “low delta speculation,” but was keen to emphasize that if Treasury actually did announce a shift, it’d have “the largest impact on duration” of any bull narratives out there. Treasury “could be open to slowing or adjusting the amount of long-end issuance versus bills in a ‘twist-like’ adjustment which would catch prior supply assumptions flat-footed,” he wrote.

According to Barclays’s estimates, if T-bills’ share of outstanding debt rose three percentage points by the end of 2025, net issuance of notes and bonds would be $900 billion lower. “While issuing longer-dated securities reduces the volatility of interest costs, a persistently high term premium also raises the ex-ante cost of doing so,” the bank remarked.

Amusingly, Thursday’s disproportionate long-end selloff came just as mainstream financial media outlets described profit taking in steepeners. “The momentum feels exhausted,” one strategist told Bloomberg. “Probably much like the bond bearish momentum overall.” If I knew how to type a smirk emoji, I’d type one.