Friday's changes: crude oil continues to surge, US stocks drop again, but Treasury bonds are "not following," has the market started "pricing in a recession"?

Ask AI · Why U.S. Treasury yields unexpectedly fall when oil prices surge?

While global crude oil prices continue to climb amid ongoing geopolitical conflicts and U.S. stocks have kept falling for consecutive days, U.S. Treasury yields unexpectedly pulled back from their highs on Friday, breaking the recent pattern of rising in tandem with oil prices and highlighting that the market’s pricing logic may be shifting.

On Friday, as tensions between the United States and Iran continued to intensify, benchmark WTI crude oil futures climbed to a multi-year high of $99.64 per barrel, while the Nasdaq Composite Index fell into a correction range. However, the two-year U.S. Treasury yield—which is highly sensitive to Federal Reserve monetary policy—declined to 3.90%.

This rare decoupling in the performance of assets suggests that financial markets may be approaching a key turning point. While investors briefly chase high-yield bonds within the year, their main focus is rapidly shifting away from short-term inflation fears triggered by energy price spikes and toward deeper concerns about long-term economic stagnation, even recession.

As verbal interventions aimed at curbing oil prices gradually lose effectiveness, and pressure from U.S. Treasury debt issuance becomes increasingly apparent, Wall Street is being forced to reassess the valuation framework for risk assets and the potential downside risks to the macroeconomy.

Treasury bond trend decouples; growth worries outweigh inflation panic

Market charts show that in the recent period, asset prices have followed a typical “high oil prices, low stock market, high yields” linkage pattern. But on Friday, the trajectory of U.S. Treasury yields clearly deviated from that track. The chart clearly reflects that, while oil prices continued to rise and U.S. stocks were sold off, Treasury yields did not climb as usual—instead, they fell noticeably, completing a clear logical decoupling.

For this unusual phenomenon, the market offers two explanations. According to Bloomberg’s analysis, on the one hand, after yields rose to their highest level since mid-2025, the elevated yields themselves attracted substantial buying demand, leading investors to question whether the energy crisis will really cause the Federal Reserve to hike rates against its own stance.

On the other hand, the deeper reason lies in the deterioration of economic fundamentals expectations. Bloomberg reports that Ian Lyngen, Head of U.S. Rates Strategy at BMO Capital Markets, said: “The front end of the Treasury yield curve is no longer treating energy prices as the inflation risk to follow; instead, it’s focusing more on risks to economic growth and downside risks for risk assets.” ZeroHedge also noted that investors are shifting from worries about short-term inflation to fears of a long-term economic downturn and ongoing supply chain disruptions.

Oil price ignores verbal intervention; supply crisis worsens

The strong performance of the crude oil market is the core source of recent asset-price volatility. Although U.S. President Donald Trump temporarily extended the deadline for pausing attacks, briefly causing the oil market to pull back, as the fighting in the Middle East entered its fifth week, the situation’s further escalation ultimately pushed oil prices higher.

According to ZeroHedge analysis, the real impact of the oil market is evolving from flow disruptions to inventory depletion. Market liquidity is worsening: investors are no longer pricing a resolution to the short-term conflict, but are pricing the escalation of the situation and tighter supply. Goldman traders emphasized the limitations of verbal intervention, saying, “You can’t jawbone molecules” ( “you can’t jawbone molecules.” ).

Oil price shocks have sparked worries about stagflation. John Briggs, Head of U.S. Rates Strategy at Natixis, said that as long as the Strait of Hormuz remains closed, investors will worry about mid-term inflation and the possibility that central banks may repeat the aggressive tightening response seen in 2022.

U.S. stocks slide under pressure; Nasdaq officially enters a correction

High energy costs and ongoing macro uncertainty have dealt a heavy blow to risk assets. The Nasdaq Composite Index is down more than 3% this week, officially entering a correction range of a 10% pullback from historical highs. Meanwhile, the S&P 500 has recorded its fifth consecutive week of decline, the longest losing streak since May 2022.

Tech stocks have become the worst hit by selling. According to Bloomberg industry research strategist Nathaniel Welnhofer, recent pullbacks in tech stocks have reduced the forward P/E valuation premium of the Nasdaq relative to the S&P 500 to just 4.4%, the lowest level since January 2019—far below the 35.7% premium seen in October last year.

The options market structure also amplifies the fragility of the stock market. ZeroHedge noted that as implied volatility rises, the market is in a negative gamma (gamma) state; higher volatility will trigger more passive hedging selloffs, thereby magnifying the downside move of the index.

Debt-issuance pressure comes into view; the market faces a double squeeze

In addition to downside risks to the economy, the U.S. Treasury market is also facing real pressure from the supply side. Bloomberg reports that Citi economist Andrew Hollenhorst said the outlook for the U.S. government to increase borrowing in order to deal with war costs and to refinance debt at higher interest rates is creating upward pressure on Treasury yields. Treasury auctions this week cleared at yields higher than expected, highlighting the severity of fiscal challenges as rates rise.

At the same time, market expectations for monetary policy have swung dramatically. TD Securities rates strategist Molly Brooks said: “The market has made a 180-degree turn; participants have shifted from asking when the next rate cut will happen to pricing rate hikes for the future.”

Against this backdrop, investors have no choice but to find a balance between high inflation and weak growth. As Goldman analyst Tony Pasquariello summed up, the longer geopolitical conflict drags on, the higher the market’s vulnerability to genuine growth panic.