Rapid bond yield moves have preceded nearly every major financial blowup: Chart of the Day

The risk around rising bond yields isn’t just higher borrowing costs. It’s what happens when yields move too far too fast.

Macquarie strategists pointed out that “almost all of the high-profile financial blow-outs” over the past five decades have occurred in the immediate aftermath of rapid moves in bond yields.

“That is, in the past 50 years, sharp increases (or sharp decreases) in long-term yields have taken place every few years, and when they have taken place, another financial company, or heavy borrower has imploded,” Macquarie global strategists Thierry Wizman and Gareth Berry wrote on Wednesday.

Read more: How soaring Treasury yields could hit your finances

Macquarie research points to “balance sheet-induced mini-crises” following rapid yield moves, ranging from the collapse of Franklin National Bank in 1974 to the municipal bankruptcy of Orange County in 1994 and, most recently, the implosion of Silicon Valley Bank in 2023.

The $200 billion institution collapsed in less than 48 hours after Federal Reserve interest rate hikes eroded the value of the bank’s long-term bond portfolio.

The blowout in Treasury yields, which move inversely with bond prices, has been happening worldwide.

As the 10-year Treasury (^TNX) recently climbed to its highest level since 2002, France, Italy, Indonesia, Japan, and South Korea have also seen their benchmark yields rise at least 100 basis points since the start of the year, according to Yardeni Research data.

Macquarie strategists argue that there is a “direct and self-reinforcing causal connection” between recent street riots over proposed budget cuts in France and the European country’s bond market stress.

Even as bond yields revert to their levels prior to the 2008 financial crisis, strong earnings coupled with a pause in interest rate hikes from the Fed, are expected to keep the stock market grinding higher.

That doesn’t mean Wall Street strategists aren’t watching for a critical threshold in the 10-year yield.

“Historical data show that valuations start compressing after 5.5%, and everyone from investors to corporations to consumers would have to redo the math on their investments,” Fundstrat economic strategist Hardika Singh recently noted.

Ines Ferre is a Senior Business Reporter for Yahoo Finance covering the US stock market, publicly traded companies, and commodities.

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