US bond yields are soaring, and Barclays has made a shocking statement: only a major drop in US stocks can save the bond market!

Barclays has stated that unless the stock market continues to decline and fixed-income assets regain attractiveness for investors, the global bond market is destined to continue to fall.

Analysts such as Ajay Rajadhyaksha wrote in a report that bond yields do not have a magical level where they automatically attract enough buyers to trigger a sustained rise in the bond market.

Barclays poured cold water on the bond market bulls, stating that those waiting for weak economic data to save bond bulls may be disappointed. Mortgage rates close to 8% and long-term US bonds close to 5% could significantly weaken the economy, but the pace of decline is not fast enough to help the current bond market.

Barclays analyzed the supply and demand situation in the US bond market:

• The Federal Reserve is currently a net seller of US bonds. Barclays analysts expect that the Fed is unlikely to relax its quantitative tightening (QT) plan or restart QE to rescue the bond market.
• The rise in the US deficit has led to an increase in bond supply, pushing up term premiums.
• Slowing net purchases by foreign central banks indicate weak demand. Japanese investors are the largest foreign holders of US bonds, but they may currently prefer domestic Japanese bonds because when the Bank of Japan adjusts its accommodative monetary policy stance, Japanese bond yields will rise.

Barclays pointed out that the above supply and demand indicate that the fate of the bond market lies in the hands of the stock market. In the short term, one scenario where bonds could rise significantly is if risk assets plummet in the coming weeks. The S&P 500 index has fallen by about 5% in the past three months, but this is far below the level needed to trigger a rebound in the bond market.

Barclays believes that the scale of the bond market sell-off is so staggering that from a valuation perspective, the stock market may be more expensive than a month ago. The ultimate way for bonds to stabilize is for risk assets to be repriced downward.

The chart below shows the relationship between US bond yields and US stocks, with the coordinates of the real yield on the right side, arranged in reverse order. It can be seen from the chart that there is currently a significant deviation between the two, and from the previous fitting situation, there is a trend of reducing the deviation.

Barclays also mentioned that one way the Federal Reserve could help long-term US bonds is by continuing to raise interest rates significantly, making the market believe that a US economic recession is imminent and therefore buying long-term US bonds. However, this is highly unlikely, and the Fed is likely to maintain the status quo.

Barclays concluded in the report that without a major decline in the stock market, the bond market will not stabilize, and considering the ultimate reaction of risk assets to bonds, risk assets will not stabilize either. There is still a lot of room for a significant decline in the stock market before the bond market stabilizes.

In recent months, the sharp drop in US Treasuries has had an impact on the global bond market, as investors expect borrowing costs to remain at higher levels for a longer period of time. Although the sell-off has eased in the past two days, traders remain highly vigilant about the resurgence of volatility, especially if Friday's US non-farm payroll data exceeds expectations. Barclays' report is similar to the recent views of Goldman Sachs and JPMorgan, which suggest that the continued rise in interest rates could pose a threat to the financial stability of the United States.

The latest article from "New Fed Communication Agency" states that the surge in US bond yields is destroying hopes of a soft landing for the US economy and increasing the risk of a financial market collapse, thereby weakening the rationale for the Federal Reserve to raise interest rates again this year. The consensus on Wall Street is that if Friday's non-farm payroll exceeds expectations, it will further intensify bond selling and strengthen the US dollar, even forcing the Federal Reserve to reconsider its balance sheet reduction policy.