Is the rebound an illusion? The bond market has already provided the answer

Original Title: The Bond Market Isn't Buying This Rally. Neither Am I.
Original Author: KURT S. ALTRICHTER, CRPS
Translation by: Peggy, BlockBeats

Editor's Note: As the stock market quickly recovers from wartime declines and approaches historical highs, a narrative of "risk has been cleared" is regaining dominance. However, this article reminds us that if we only look at the equity market, it is easy to misjudge the current real environment.

The signals from bonds and crude oil are not consistent: rising interest rates and high oil prices point to persistent inflation, limited policy space for the Federal Reserve, and ongoing geopolitical conflicts that have not truly settled. In contrast, the stock market is pricing in low inflation, a restart of interest rate cuts, manageable costs, and conflict resolution, which is a set of highly idealized premises.

The author believes that this round of rebound is driven more by momentum than by fundamentals. Under the trading behavior of "not wanting to miss the rise," prices can deviate from reality in the short term, but ultimately must return to ranges determined by macro variables.

When discrepancies arise between different asset classes, the real risk often lies not in who is right or wrong, but in how this discrepancy is resolved. The current issue is not whether the market is optimistic, but whether this optimism has already outpaced the data.

Here is the original text:

"Rule Two: Excessive volatility in one direction often leads to excessive reversals in the opposite direction." ------ Bob Farrell

The S&P 500 has completely recovered all declines during the U.S.-Iran conflict. As of yesterday, the index is up 1% from February 27 (the day before the first strike against Iran) and is just a step away from its all-time high (less than 1%).

In just 10 trading days, the market has completed a full round trip.

Let me be straightforward: if you only look at the stock market right now, everything seems to be "recovering healthily." War breaks out, the market falls, then quickly rebounds, everything returns to normal, and everyone moves forward.

But if you widen your perspective, this is not the real situation that is happening.

The bond market has not confirmed this round of increase.

The crude oil market has also not confirmed this round of increase.

When the two most important markets in the world are telling a story different from that of the stock market, this is certainly a signal that cannot be ignored.

So, what is the stock market currently pricing in?

For the S&P 500 to stand above pre-war levels, the market actually needs to believe in the following several things simultaneously:

Current oil prices are not enough to materially suppress consumption.

The Federal Reserve will ignore the overheated inflation data and still choose to cut interest rates.

Higher raw material and transportation costs will not erode corporate profit margins.

The Middle East conflict will be close enough to resolution within six months, thus no longer posing a risk.

Perhaps things will really develop this way. I'm not saying it's impossible. But these are quite aggressive premises, and the data released by the current bond and crude oil markets do not support these assumptions.

From a fundamental perspective, the pricing of the stock market is already close to "perfect expectations."

Let's take a look at more specific data

On February 27, the day before the war broke out, the closing conditions of key indicators were as follows:

10-year U.S. Treasury yield: 3.95%, while yesterday it closed at 4.25%, an increase of 30 basis points from pre-war levels.

WTI crude oil: $67.02, the current price is about 37% higher than at that time.

2-year U.S. Treasury yield: 3.38%, yesterday it closed at 3.75%, an increase of nearly 40 basis points from pre-war levels.

Now, let's break down the implications behind these changes one by one.

The 10-year yield rising by 30 basis points after the outbreak of war is not because the bond market is more optimistic about economic growth. Current consumer sentiment is weakening, and confidence remains weak. This rise in interest rates is essentially the bond market "quietly" pricing in inflation.

The signal it conveys is clear: higher oil prices are being transmitted to the overall price system, and the future policy space of the Federal Reserve may not be as loose as the stock market assumes.

Oil prices have risen 37% in six weeks, which is not the behavior one would expect if the market believed that a genuine, lasting agreement between the U.S. and Iran was imminent.

If traders were truly confident in a stable ceasefire agreement, oil prices should have already fallen back to the $70 range and continued to decline. But that is not the case. Oil prices remain high, which means the crude oil market has not priced in the same expectation of "conflict resolution" as the stock market.

And the 2-year U.S. Treasury yield is still 40 basis points higher than pre-war levels, which itself is a direct challenge to the narrative of "the Federal Reserve is about to cut interest rates."

The 2-year yield is the most sensitive indicator we observe for interest rate expectations, reflecting the Federal Reserve's policy path more directly than any other asset. And right now, it conveys the signal that the Federal Reserve's operational space is smaller than the market imagines. This will affect almost all valuation logic supporting this round of stock market rise.

So, who is right?

The stock market may be right, and I am willing to admit that. If a substantial ceasefire agreement really occurs, bond yields may quickly fall; once supply issues are credibly resolved, oil prices may also drop significantly. This is not the first time the stock market has led, with other markets subsequently "catching up" or following.

But there is another explanation that I believe is currently underestimated.

A large part of this rise is not driven by fundamentals but by momentum. Traders are unwilling to short in an upward trend, and this behavior itself continuously pushes the market higher. Such buying can indeed sustain the rally longer than it should.

But it does not change the underlying logic.

And the underlying reality is: oil prices remain high, interest rates are still rising, and the Federal Reserve's space for rate cuts is more limited than what the bulls need.

Fundamentally driven rises tend to be more sustainable; whereas momentum-driven rises are usually weaker and shorter-lived. When you consider whether to increase your position near historical highs, this difference is particularly critical. As shown in the market valuation chart above, the current stock market is already pricing in a "perfect scenario."

My Actual Judgment

The situation has indeed improved over the past 10 days, and I will not deny that. I am also not someone who is bearish for no reason.

However, there remains a significant gap between the stock market's pricing and the realities reflected by bonds and crude oil, and this gap has not narrowed. I am closely monitoring this.

Currently, the stock market is at the most optimistic end of the range; while bonds and crude oil are closer to the middle position, reflecting a world where inflation still exists, the Federal Reserve's policy space is limited, and conflicts have not truly been resolved.

This discrepancy will ultimately be resolved, and there are only two paths:

Either a genuine ceasefire agreement is reached, oil prices fall back to around $70, and the Federal Reserve gains clear space for rate cuts, ultimately proving the stock market is correct;

Or none of this will happen, and the stock market will fall, aligning with the levels currently reflected by bonds and crude oil.

And at present, there are no signs that bonds and crude oil are aligning with the stock market; it seems more like the stock market needs to decline to "align" with them.

The next inflation data will be released on May 12. If my judgment is correct and CPI is above 3.5%, then the narrative of rate cuts in 2026 will essentially be declared over.

If you continue to increase your position at this point, you are essentially betting that everything will develop in the most ideal direction: the war ends smoothly, without interference from "Trump's sudden remarks"; inflation remains controllable; the Federal Reserve cuts rates as planned; corporate profits stabilize. All four of these things must occur simultaneously. If any one of them deviates significantly, the market's downward adjustment process could be swift and severe.

In contrast, I would prefer to remain patient rather than chase a rise that is "quietly denied" by two key asset classes. If long-term signals point to buying, we will naturally increase our positions gradually according to strategy.

And don't forget— the only thing we can be certain of is that everything will eventually change.