To The Moon

English version:

If there is only one number worth watching closely in today's market, it is probably the 10-year U.S. Treasury yield. It is no longer just a KPI for bond traders; it has become a common pricing anchor for U.S. equities, gold, crude oil and even Bitcoin. With that anchor pushed to a historic high of 5.2%, and the market having priced in both of the remaining rate hikes this year, a more important question arises: How much higher can it go?

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I. One Master Switch Holds the Reins of Every Asset

Let me start with the conclusion. For the assets people follow most closely—U.S. equities, gold and Bitcoin—the biggest point of tension, or the main anchor for price action, is the movement in Treasury yields this week. Nearly every asset class is being pulled along by this one factor.

In terms of sensitivity, the rough ranking is crude oil first, then gold, then equity indexes. The interesting part is that, in terms of the underlying mechanism, moves in oil prices drive moves in yields. Yet on the screen, Treasury yields and oil prices move in the same direction, with a very clear positive correlation.

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Crude oil futures prices versus the 10-year U.S. Treasury yield:

II. Range-Bound Oil Is Dulling the Rates Market's Sensitivity

Crude oil is the biggest and most sensitive variable affecting Treasury yields. But right now, that variable is constrained: as relations between Trump and Iran reach a stalemate, oil prices have been confined to a relatively narrow trading range. The crude oil calendar-spread options strategy we proposed last week was based on precisely that assessment. Judging from its profitability a week later, oil prices have indeed continued to oscillate within that narrow range:

The calendar spread, along with several other options strategies we discussed last week, is now mostly in profit:

But the significance goes well beyond the profit or loss on an options trade. This range-bound movement, with a ceiling above and a floor below, is gradually reducing the rates market's sensitivity to oil-price moves. Put simply, Treasury yields may remain elevated while their upward momentum slows, rather than continuing to rise sharply, as oil prices oscillate.

III. An “Empty” Summit That Is Really About Yields

Apart from oil-price movements, the biggest news last week was the high-level U.S.–China meeting. I do not think Trump's effort to engage senior Chinese officials in diplomatic talks at this point was really about making a breakthrough on an agreement. His main aim was to preserve a baseline of balance in bilateral relations. He may well hope that, ahead of the U.S. elections and at such a sensitive moment, with yields already surging to historic highs, China will cooperate with the U.S. to help stabilize the American market and minimize trading activity that could trigger volatility—for example, increasing crude oil imports or stepping up sales of U.S. Treasuries.

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Those two possibilities are not unfounded. Readers who regularly follow our analysis will know that China's crude oil imports have suddenly picked up over the past two or three weeks, and domestic crude oil futures prices have surged as a result. Just a month ago, however, China's import volumes had remained at historic lows—which created favorable conditions for a decline in U.S. crude prices.

Previously: Macro Strategy Weekly: China's Rebounding Energy Demand Is Pushing Global Yields Higher—What Is the Best Options Strategy for a Choppy Market?

There is a deeper historical dimension, dating back to the start of the trade war several years ago. When supply chains for finished goods ordered by the U.S. from China were disrupted, it was U.S. prices that were actually hit hardest; you can check the data for yourselves. The loss of access to many inexpensive manufactured and handcrafted goods directly pushed up U.S. prices. By comparison, China's economy was not affected nearly as much by the trade war. The data show that total U.S. imports containing Chinese raw materials and products (the blue line in the chart) did not fall by much.

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This has also kept China's trade surplus relatively high, and it has continued to rise with the development of the AI boom:

That is why we think Trump's intentions this time may also be about inflation expectations—in other words, Treasury yields. In short, Trump's overriding priority before the midterms is to bring soaring yields down.

IV. Why Elevated Yields Won't Necessarily Crash U.S. Stocks

An important distinction is needed here: even if yields remain high, U.S. stocks will not necessarily suffer a crash. A modest, gradual decline is still possible, but it would probably remain within the previous trading range. $1.5倍做空NVDA ETF-Tradr(NVDS)$ $英伟达(NVDA)$ $美光科技(MU)$ $谷歌(GOOG)$ $亚马逊(AMZN)$ $特斯拉(TSLA)$

There are two reasons for this assessment:

The first is the valuation benefit that a stronger U.S. Dollar Index brings to dollar-denominated assets.

Following the hawkish rate decision announced by Warsh several weeks ago, the probabilities of rate hikes in both October and December have been rising:

In the interest-rate derivatives market, the probability of a December rate hike has reached 79.2%, while October's stands at 68.6%. The biggest impact has been on the U.S. Dollar Index: its weekly-chart lows have been rising, and it now appears close to breaking through the important weekly resistance level at 101.6. If it breaks through, the upward surge is likely to continue. A stronger Dollar Index is actually good for dollar-denominated assets such as U.S. equities and Treasuries.

The second reason is that, based on institutional forecasts for the future growth of several leading technology names in the AI supply chain, a 5% 10-year Treasury yield may not put too much pressure on their absolute valuations. Here, it is worth paying attention to a recent Goldman Sachs study:

With the 10-year Treasury yield now at a historic high of 5.2%, Goldman Sachs finds that, if the absolute valuations of major technology stocks are to remain unchanged—that is, if the gap between their future growth rates and the risk-free rate is to remain unchanged—these stocks will need to generate an overall 15% return on investment. According to Goldman Sachs analyst Eric Sheridan's estimate, Alphabet, Amazon, Microsoft, Meta, Oracle and SpaceX would need to generate a combined $1.42 trillion in revenue over 2028–2030 to earn a 15% return on their AI buildout during 2026–2027.

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That sounds astronomical. But there is another side to the calculation: the three major public cloud providers—Amazon, Microsoft and Alphabet—already have a combined order backlog of $1.69 trillion. Goldman Sachs therefore calculates that they would need to convert only about 59% of their existing backlog into future revenue to meet the 15% return-on-investment threshold for AI spending.

In other words, these leading AI technology stocks can still tolerate a 10-year Treasury yield of 5.2% fairly well. With that in mind, we believe the risk of a major U.S. equity crash over the next two to three months is low, although a mild pullback of less than 6% remains possible. Higher yields are unlikely to bring the medium- to long-term uptrend to an end.

As for strategy, we are sticking with selling puts at lower levels. Alongside selling puts on equity indexes at lower levels, we are also continuing to hold our crude oil calendar spread.

VI. Core View: Hawkish Expectations May Already Be Overpriced

Now back to the central question: Can Treasury yields keep rising? My answer is that they have probably already reached a near-term high.

First, consider the political calculus. Remember the forceful remarks Treasury Secretary Bessent made earlier this year? Bessent said his job was to lower the 10-year Treasury yield. Given that it has now exceeded 5%, he has clearly failed at that task. Combined with an inflation outlook that could become almost uncontrollable, this could easily hand Democrats an issue to use against Republicans in the midterm elections. So it is clear that the Trump administration's main priorities before the midterms are threefold: bring yields down, contain inflation expectations and prevent a stock-market crash.

We have already covered the stock-market part. On inflation, the key is to keep oil prices under control and manage the U.S.–Iran conflict. And Treasuries? In my view, as long as oil prices remain stable and the U.S.–Iran conflict shows no clear signs of escalation, Treasury yields are very likely to have reached a near-term high.

For yields to move up another notch, there would need to be an event that intensifies hawkish expectations—for example, an escalation of the U.S.–Iran conflict that drives oil prices higher and fuels inflation expectations; or an even more explicitly hawkish stance from the Federal Reserve that pushes rate-hike expectations in the derivatives market to new highs.

As long as nothing like that happens, the Treasury market has already priced in future rate hikes sufficiently. It expects two more hikes this year, in October and December, and both are plainly reflected in prices. Historically, the U.S. has had virtually no precedent for two consecutive rate hikes in a midterm-election year. Taken together, these points lead to a fairly clear conclusion: Treasury yields may have reached a near-term high, and the earlier hawkish repricing may have gone too far.

VII. CTAs Have Little Left to Sell, While the Relative Value of Stocks and Bonds Is at a 25-Year Extreme

Next come positioning and the risk-reward calculation—harder evidence than a narrative.

First, consider CTA fund positioning. Their positions in 10-year Treasuries are close to the lows of recent years, so the near- to medium-term convexity is clearly to the upside. In the short term, CTAs have little room left to sell or add to short positions; if Treasuries rebound, the upside could therefore be substantial:

Second is the relative value of stocks and bonds. The spread between the S&P 500's earnings yield—the inverse of its price-to-earnings ratio—and the 10-year Treasury yield has reached a 25-year low. Treasuries are now historically cheap relative to stocks. Put differently, holding Treasuries offers a roughly 5% yield with almost no risk by comparison. Can holding the S&P 500 offer the same? That is the biggest reason for capital to flow into Treasuries.

Finally, consider speculative positioning. The latest CFTC positioning data show that speculators have increasingly begun to bet on a rebound in longer-dated Treasuries: net positioning in 10-year Treasuries is moving back toward neutral from deeply bearish levels:

VIII. Two Actionable Indicators: 18 Basis Points and the 5% Threshold

So what should we watch?

CTA funds generally trigger systematic trading based on the variance of an asset's price movements over a given period. In other words, once Treasuries rebound by more than one or two standard deviations, CTA funds will buy them. According to Bank of America's estimate, the minimum threshold is 18 basis points—meaning that a decline of more than 18 basis points in the 10-year Treasury yield could help trigger a Treasury rally.

To be on the safe side, I am using 5% as the key reference level: if the 10-year Treasury yield falls below 5%, it may be worth considering buying Treasuries near their lows, using TLT as the ETF vehicle. If it does not break below 5%, do not take the risk of trying to buy the bottom in Treasuries.

And once it does break below 5%, I expect U.S. stocks and gold to rebound in the short term as well. We can then position ourselves accordingly.

IX. Which Strategies Should We Consider Now?

For this week, I am still sticking with selling puts on equity indexes at lower levels. One possibility is to sell QQQ puts with strikes below the 685 support level, rolling the position weekly.

We can also continue selling Nvidia puts. Consider strikes below Nvidia's 20-week moving average—around 207.

In addition, we are still considering holding the crude oil calendar spread mentioned last week, which seeks to profit from the difference in time-value decay while oil oscillates within its trading range.

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Another option, after the 10-year Treasury yield falls below 5%, is to try taking a small position in the long-duration Treasury ETF TLT near its lows.