Where’s the peak for 10-year US yields?

That’s not just a question, it’s the question. After all, benchmark US government bonds are the securities off which virtually everything else in the world is ultimately priced. Those securities are a falling knife at the moment. The US long-end is unmoored and behaves on some days like an unruly kite.

This week was particularly harrowing. 10-year yields rose 30bps. Reals were higher, breakevens were higher and the term premium repriced further, nearly reaching 50bps.

The sudden jump in breakevens was an unwelcome development that introduced additional uncertainty into an already volatile situation.

On Friday, I wrote at length about the failure of US Treasurys to hedge the geopolitical flashpoint in Gaza. There are at least three arguments for why Israel’s war with Hamas is bond-bearish:

1. There could be a supply event for crude depending on how the situation develops. Higher crude can knock on into breakevens
2. War spending is an example of fiscal profligacy, and America’s fiscal trajectory is a focal point for bond bears. War spending could also be stimulative, which is tantamount to being inflationary
3. If military aid to Ukraine and Israel is delayed due to infighting among House Republicans, concerns around US government dysfunction would only grow

Note the paradox inherent in points two and three: Green-lighting fresh military spending could be bearish for Treasurys, but not green-lighting it could be bearish too. If House Republicans can’t even see their way to electing a Speaker, and that failure prevents Congress from aiding Israel after a terrorist attack, what does that say about the prospects of, for example, entitlement reform?

Put differently (and putting aside the debate around whether Israel actually needs any more encouragement when it comes to the Gaza siege), if the US political process is now so broken that Republicans can’t put aside intra-party differences in order to spend a few billion shoring up Israel in a fight against extremists, what hope is there for bipartisan fiscal reform around something as notoriously controversial as entitlement spending?

In any event, it’s problematic (to put it politely) when reals and breakevens are rising together and market participants are keen to build in more term premium seemingly every session.

“Viewed solely through the lens of inflationary concerns parallels exist [with Ukraine] in the event oil producing nations are brought into the conflict [and] perhaps that’s precisely what’s occurring in the breakevens space as the prospects for a protracted conflict in Israel have emerged,” BMO’s Ian Lyngen and Ben Jeffery said. “A surge in 10-year yields beyond 5% would imply either greater energy inflation angst and/or an extension of the requirement for more term premium,” they added. “In light of the evolution of recent developments, Treasuries are grappling with both factors to some degree.”

Indeed. And, again, that’s pretty vexing.

Goldman’s Praveen Korapaty had a suggestion. “Our previous study, based on the average magnitude of similarly sharp selloffs, suggested that the current range reset may top out around 4.8%. Having exceeded that level, we believe the move up could face its next challenge around 5.1-5.25%, roughly the yields investors would earn on money market accounts or T-bills,” he wrote, noting that what’s already a “compelling medium-term case for owning bonds” would become very difficult to ignore in the event yields “no longer trade[d] at a clear discount to cash alternatives.”