Why the bond market is flashing red for risk and major equity investors are worried

Alarm bells are blaring at the long end of bond markets about the global economy's health, as equity managers' fingers hover over the sell button to protect profits after 2025's shock bull run. 

The ballooning bond market rebellion is a symptom of too much global debt and unsustainable government spending, as rising yields in the US, UK, Japan, and France signal worries about slowing growth and rebounding inflation. 

Bond yields rise when investors demand more compensation for the risk of holding government debt and rights to future cash flows on the basis that the value of today's money in the future is falling. 

Equity managers getting nervous

One advantage I have here at Livewire Markets is that I get to listen to lots of top equity fund managers, and without a doubt, their number one concern is that rising risk-free rates (such as 10-year yields) mean share market valuations will fall. 

In 2022, the tech-heavy Nasdaq Index crashed 33% and the local S&P/ASX 200 Index fell 1.08%, as professional investors dumped stocks because risk-free rates rose on the back of the fastest pace of central bank interest rate hikes in a generation. 

There's no room for doubt that if the long end of the bond market spirals out of control in 2025, shares will fall sharply, as the powerful institutional investors that really move markets will rush to hit the sell button. 

As another example, you only need to recall back to April 2025's mini stock market meltdown, which was a consequence of bond yields surging on worries that President Trump's Liberation Day tariffs would kill growth and spike inflation. 

Just yesterday, I was listening to a presentation by a chief investment officer at one of Australia's largest and most powerful hedge funds. His biggest worry? No doubt it was bond market price action and what it signalled about growth, inflation, and global debt. 

Bond vigilantes versus central bankers

The long end of the bond market, at 10-year and 30-year maturities, is important as it's much harder for central banks to influence than the short end, which is far more closely correlated to overnight cash rates controlled by policymakers. 

This comes back to the age-old question as to who really controls rates, the central bankers or the bond vigilantes? 

If long-end bond yields keep rising and force central banks in the US, Japan, Europe and Australia to pare back rate cut forecasts, or even lift rates to manage inflation, we'll know the bond traders are still Kings of the Jungle. 

Moreover, an inflation-fuelled rebellion around short-term rate trajectories is all but certain to pop a share market bubble that's been growing over an unprecedented 36-month bull run. 

Gold and yields signal stress

Gold is another asset and risk-off bellwether I've written a lot about recently. And not for nothing either. 

It's surged 40% this year in a highly abnormal move to a record high on Wednesday at $US3,534 an ounce. It signals stress, alongside inflation worries in the financial system, with chaos agent President Trump as the world's best gold salesman. 

The precious metal, arguably, also tells you a lot more about the economic outlook than stock markets that include mega-cap meme stocks, among other absurd valuations. 

So investors should keep an eye on 10-year and 30-year yields. You can also watch the spread between 5-year and 30-year bonds for signs that it's widening to show investors are voting down central banks' plans to cut rates. 

Credit spreads between investment-grade debt and lower-rated corporate debt are also near their narrowest since 1998, in something that should tell investors a lot about the state of private credit markets. 

In the UK, 30-year yields are now their highest since 1998 at 5.70%, in heavily indebted Japan, the 30-year yield is at 3.28% and also at a multi-decade high. The UK and France both have out-of-control spending problems. 

An Asia equities strategist I attended a lunch with recently covered how its mega US debt pile (much of it unhedged) could be close to the island nation's entire GDP. This threatens a massive carry trade unwind if the US dollar loses value, similar to Japan's problems. 

US 30-year yields are at 4.97%. As a reference point, it was when they topped 5% last April that President Trump quickly abandoned his Liberation Day tariff rates.