Recently, rising inflation risks have led to rising bond volatility and yields. How high can U.S. bonds rise to the point that U.S. stocks may be in trouble?

According to media reports on Monday, Tony Pasquariello, head of hedge fund sales at Goldman Sachs, pointed out that when the 10-year U.S. Treasury yield was 4-5% and rising, the average performance of the S&P Index from 1 to 12 months was in the low single digits, while Once it gets above 5%, there's actually a decline on average.

Historical data shows that when the U.S. 10-year Treasury yield changes by 2 standard deviations, which is equivalent to about 60 basis points today, the impact really begins more than a month later. Consider that during Easter the yield was 4.20%. Experience with this rule shows that when the 10-year yield approaches 4.80%, things get tricky for the U.S. stock market.

The current 2-year swap real interest rate is still in the range of 1.5-2.5%, which has been normal for U.S. stocks since 2022.

It is worth mentioning that investors are missing out on the opportunity to short U.S. debt.

JPMorgan Chase's survey of clients' U.S. debt positions shows that clients' net positions are nearly flat, with unusually few direct short positions, and net short positions at a 20-year low.

At the same time, Commodity Futures Trading Commission positioning data shows that speculators are net short Treasury bonds, but this data is seriously distorted by basis trading (that is, cash bonds and futures trading); and through a bond futures positioning method that eliminates the impact of basis trading. Look, although investors' net positions are declining, they are still net long overall.

That suggests traders are reducing their bullish bets as recession risks recede, but remain reluctant to go short directly.

Additionally, bond volatility has been declining despite rising risks to economic growth and inflation. There is a clear divergence between inflation volatility and bond volatility, with the former rising but the latter not rising in tandem. This suggests that the Fed's growth tolerance, and the resulting combination of rate cuts and higher terminal rates, could dampen volatility.

The analysis points out that this gap may eventually be bridged by rising bond volatility. Given that inflation continues to be high and yields may also hover at high levels, current short bond positions may be profitable in the future.