What smart investors are saying about a 2007-era warning flashing in the bond market

The bond market is back with another warning for investors this week.

Bond yields rose to fresh highs as the 60-day ceasefire between the US and Iran officially broke down, leaving markets without a resolution over the Strait of Hormuz while a peace deal between the two countries remains out of sight.

The yield on the 30-year government bond rose past 5.31% as markets took in the latest surge in oil prices, with Brent crude breaking past $90 a barrel. It marks the highest yield on the 30-year US Treasury since June 2007, just months before stocks began to tumble and the Great Financial Crisis took hold.

The bond market's logic is simple: higher oil prices mean higher inflation in the long run — or at least, that's the main fear causing investors to dump the 30-year Treasury, pushing yields higher to attract new investors.

The 30-year bond in particular is associated with concerns about the government's long-term deficit, suggesting investors are also concerned about how hotter inflation could affect the US's total debt bill. The total federal debt balance — which currently stands at $39.9 trillion — is on track to break the $40 trillion mark this week, months earlier than expected.

The yield on the benchmark 10-year US Treasury, which is more tied to borrowing costs across the economy, ticked up to 4.74%, remaining close to its highest level since 2025.

Rising bond yields are the principal factor driving the "renewed falloff" in global stocks, top economist David Rosenberg wrote in a client note on Tuesday. All three benchmark indexes in the US tumbled into the red in the morning, with the Nasdaq 100 shedding more than 1% as investors took profits in the tech sector.

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When the 30-year yield peaked at around 5.33% in 2007, it preceded the bull market's peak by about three months, Rosenberg added, citing his analysis of historical stock data.

"The major point here is that rising real rates that are not accompanied by accelerating real economic growth are almost always a prescription for a stock market pullback. While the AI spending boom (actually underestimated when you look at what is happening off-balance sheets) is the lone prop supporting the US economy, the other 93% of GDP is struggling, especially the most interest- and credit-sensitive segments," the Rosenberg Research president said.

The latest surge in bond yields is also being driven partly by concerns about the US's growing deficit and "elevated credit issuance," strategists on JPMorgan's market intelligence team wrote in a note on Tuesday.

The war in Iran has stoked concerns about the sustainability of government spending. Leading up to June 23, the conflict was estimated to cost the US between $34 billion and $42 billion, according to estimates from the Center for Strategic and International Studies.

In the past, spending concerns have triggered a resurgence of the "bond vigilantes" — investors who attempt to pressure the US into more fiscally favorable policies by staging a coordinated sell-off in bonds.

The sell-off in bonds has accelerated in recent weeks, something that will be difficult for stock investors to ignore, according to Kent Fung, the vice president of market intelligence at Fundstrat Research.

"Equities have shown only minor weakness so far, but with more than half the sectors closing at new two-day lows, it pays to be vigilant about at least a minor selloff developing," Fung wrote in a client note.

The consumer discretionary, materials, communication services, healthcare, financials, and consumer staples sectors of the S&P 500 are in the red over the last five trading days, with consumer discretionary and materials stocks posting the steepest losses, data from State Street Investment Management shows.

30-year government bond yields spiked in several other countries, a sign that fiscal concerns are rising around the globe.

The yield on Germany's 30-year government bond rose to 3.74%, its highest level since 2011. France's 30-year bond yield rose to 4.87%, its highest level since 2008, analysts at Deutsche Bank wrote in a note.

Top economist Mohamed El-Erian also pointed to the global sell-off in long-dated bonds this week, flagging the risk of "Lagged Economic Responses" as borrowing costs around the world rise.

"The repricing out of tech and government bond issuance will lag the damage that higher yields could inflict on traditionally rate-sensitive sectors, including housing, autos, and highly leveraged finance," El-Erian wrote in a post on LinkedIn on Tuesday.

Yields rose sharply in the months leading up to the last five major market bubbles, according to an analysis from Ned Davis Research.

The investment research firm pointed in particular to the 1929 bubble in US stocks, the 1980 bubble in gold and silver, the 1989 bubble in Japanese stocks, the 2000 bubble in tech stocks, and the 2007 bubble in housing. Across all of them, policy rates and yields rose as asset prices hit an upper ceiling.

"In several cases, rates and yields kept rising after the bubble peaked," Joe Kalish, a chief macro strategist at the firm, added.

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