What factors are driving the bond yield curve higher? The former resistance level for yields in the bond market has now turned into a support floor. The longer this condition persists, the harder it becomes for the stock market to ignore it.

As of last Friday, the 30-year US Treasury yield (^TYX) has closed above 5% for 14 consecutive trading days, marking the longest streak since July 2007. Within 2026, the yield has closed above 5% for a total of 29 days, surpassing the highest annual total since 2007. Previously, long-end US Treasury yields only briefly touched the risk warning zone identified by Wall Street, but the trend has now completely shifted. If yields fall back below 5%, the risk warning signal will weaken. However, if they remain above 5%, it means the former resistance level has permanently transformed into a long-term support level.

Data sources: Yahoo Finance, AlphaSpace. US 30-Year Treasury Yield (^TYX). The yield increase is not unique to the United States; government bond yields in major developed economies worldwide are rising simultaneously. Multiple factors are exerting pressure together: rising oil prices, resilient economic data, and persistently high levels of government debt issuance. Massive debt issuance forces governments to increase competition for market funds. However, the core driving force behind this round of US yield increases is not inflation panic, as evidenced by the movement of the 10-year US Treasury yield (^TNX).

Last week, the 10-year US Treasury yield reached 4.69%, roughly flat with the May high. However, the underlying logic behind the two rallies is completely different. During the yield surge in May, the 10-year real yield was 2.16%, and the breakeven inflation rate (the market's forecast of average inflation over the next decade) was 2.5%. In contrast, last week, the real yield rose to 2.42%, while the breakeven inflation rate fell back to 2.26%. In short, the contribution of inflation concerns has decreased in this rally, with the fundamental risk-free return demanded by investors for lending funds becoming the dominant driver. The 10-year yield is approaching the May high, but this increase is mainly driven by higher funding costs, not inflation anxiety.

Information sources: Bloomberg, Yahoo Finance. Analyzing US Treasury yields can be broken down into two main components: the market's expected inflation level, and the additional return demanded by investors above inflation. The market uses the breakeven inflation rate to gauge inflation expectations and the Treasury Inflation-Protected Securities (TIPS) yield to measure the underlying return after removing inflation. A rise in the fundamental risk-free return, on one hand, makes government bonds a stronger competitor for funds compared to stocks, and on the other hand, raises overall financing costs for households and corporations.

The impact of rising yields shows clear structural differentiation. From July 6 to last Friday, the Philadelphia Semiconductor Index (^SOX) plummeted 8%, the Nasdaq Index (^IXIC) fell over 4%, and the S&P 500 Index (^GSPC) declined by less than 2%. The chip sector simultaneously faces correction pressure after its earlier surge, coupled with market concerns over AI capital expenditure and memory chip prices. But the overall pattern is clear: sectors most sensitive to interest rates are the first to come under pressure and weaken.

At this stage, the market adjustment is generally orderly. US Treasury bond volatility is lower than its peaks in March and May of this year, and coupled with strong corporate earnings reports, the broader market has been able to absorb the pressure from higher yields. The next key test is whether the Federal Reserve will endorse the bond market's pricing logic of "higher interest rates for longer." Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, stated in a recent research report: "Whether the Fed ultimately chooses to raise rates or hold steady (my base case is a pause) will determine the future direction of the market."