Are Bond Yields Becoming the Market’s Real Driver Again?

The headlines for much of this year so far have belonged to equities. But a quieter, more consequential story has been unfolding in the US government bond market, all $30 trillion of it. The benchmark 10-year Treasury yield, which is the interest rate the US government pays on ten-year loans from investors, fell to 3.96% by late February, only to reverse sharply to 4.38% by March 20. This is its highest close since last summer. On the same day, the 30-year yield reached 4.96%.

To be sure, those numbers sound dry, but the consequences have a real impact across markets. And this is what we will unpack in this week’s newsletter.

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Going into 2026, the consensus view was orderly. Charles Schwab, for example, expected the US Federal Reserve, or the Fed, to cut rates just once or twice this year. It also didn’t see the 10-year yield going too far above 4%.

But February quickly dismantled that picture. For starters, soft economic data and growing fears about artificial intelligence’s disruptive impact on jobs drove investors toward the safety of government bonds. This is because when investors are nervous, they buy government debt because of the reliability it promises. Put simply, no one expects their money to disappear when they loan it out to the US government.

The surging demand caused bond prices to rise, and yields, which always move in the opposite direction to prices, fell. By February 27, Bloomberg data showed US Treasuries had just completed their biggest monthly rally in a year, with the 10-year yield slipping below 4% for the first time since November.

Portfolio manager Vincent Ahn of Wisdom Fixed Income Management put a clear label on that level. “Below 4, the market is telling you one leg of that stool is wobbling,” he told MarketWatch, referring to the combination of healthy growth, contained inflation, and a steady Fed that has underpinned markets.

That brief calm ended on February 28, when the US and Israel launched a bombing campaign on Iran. Conventional wisdom holds that such moments push yields lower, as frightened investors pile into the safety of government bonds. But, according to Lance Roberts, RIA Advisors’ Chief Investment Strategist, that story is wrong more often than right. What actually drives yields during conflicts is oil.

When fighting threatens supply routes, in this case, the Strait of Hormuz, through which roughly one-fifth of the world’s oil passes, energy prices rise. And higher oil lifts everyday costs across the economy, which pushes up inflation. When inflation rises, bond investors demand higher returns to protect against the erosion of their money’s purchasing power, and yields climb.

The effect was swift and global. By Friday, March 20, Brent crude oil futures had settled at $112.19 a barrel and bond yields had spiked simultaneously across the US and Europe. British 10-year government bond yields pushed above 5%, their highest since the 2007/08 global financial crisis. On the other hand, German yields hit their highest since the eurozone crisis of 2011.

Also, as a consequence of the hostilities in the Middle East, the Fed held its benchmark rate steady on March 19. Fed Governor Christopher Waller, who had planned to vote for a rate cut, told CNBC the oil shock changed his mind. “This is looking like it’s going to be a much more protracted conflict, and oil prices are going to stay high for a longer time,” he said.

When bond yields rise, they act as a form of gravity on stock prices, particularly for growth companies. Just so we are on the same page, a growth stock is valued largely on the profits it is expected to generate years into the future. And to work out what those future profits are worth today, investors apply what is called a discount rate. This is essentially an interest rate that reflects the cost of waiting. When that rate rises, future profits shrink in today’s terms. Growth stocks feel this rise most acutely because they are priced on distant earnings promises.

Recent market moves have reflected exactly this. By the close of trading last week, on March 20, the S&P 500 had recorded its fourth straight weekly decline, its longest losing streak in a year. On the other hand, the NASDAQ was hovering just above the threshold that would confirm a full correction. And YieldReport cautioned that prolonged oil disruption could force 5 percentage point cuts to S&P 500 earnings estimates.

So, are bond yields the market’s real driver again? The answer is yes.

At 4.38% and climbing, the 10-year yield is signaling that borrowing is expensive, that the Fed’s room to cut rates has narrowed, and that the future profits underpinning today’s growth stock valuations must be discounted more heavily. Equities can shrug that off for a while; they often do. But the shrug has limits.