Don't just focus on stock prices. If you can't understand U.S. Treasury bonds, how can you understand the global economy?

Everyone is accustomed to watching the stock price fluctuations of NVIDIA or the rise and fall of Bitcoin, thinking that's the main battlefield for stock price movements. However, besides various technical indicators of stocks, there's another important indicator: U.S. Treasury bonds. Their fluctuations, transmitted through the interest rate mechanism, directly impact the global economy.

Today, I'll introduce you to some basic knowledge about U.S. Treasury bonds.

1. Yield Inversion: The Most Direct Recession Warning

Under normal logic, the longer you lend money to someone, the higher the risk, so the interest or yield you demand should be higher.

You can see the normal U.S. Treasury yield curve in the chart below:

But when you find that short-term Treasury yields have actually surpassed long-term Treasury yields, that's abnormal.

What does this mean?

It means investors would rather lock in low yields for the long term than be optimistic about the near-term economic outlook.

This phenomenon has accurately predicted subsequent economic recessions multiple times in history.

For example, the recession following the 2001 dot-com bubble, when the 10-year U.S. Treasury yield spiked in a short period, and also the 2008 financial crisis, when the Federal Reserve was forced to intervene by purchasing trillions of dollars in bonds to suppress yields. You can see the chart below showing the spike in the 10-year Treasury yield:

When the market exhibits this situation, it often means capital is preparing for the coming winter.

2. Reverse Pressure on Stock Market Valuations

The U.S. Treasury yield is defined as the risk-free rate, known in English as the Equity Risk Premium (ERP). You can think of it as the passing line for investments.

People use this as a reference. If you can get a 5% annual return by buying absolutely safe U.S. Treasury bonds, why would you take the risk to buy volatile stocks?

When yields rise significantly, capital naturally withdraws from the high-risk stock market and flows into the bond market. So, if you see yields rising while U.S. stocks remain at high levels, it suggests stocks may have become too expensive, and the risk of price adjustment is increasing sharply.

3. A Vote of No Confidence in the Government

The bond market not only reflects economic data but also investors' trust in the government.

If government fiscal spending spirals out of control, or with policies like the tariffs implemented by Trump, investors will protest by selling bonds.

Selling causes bond prices to fall, forcing yields to spike, which directly increases the government's borrowing costs. The ousting of former UK Prime Minister Liz Truss and the recent selling of U.S. Treasuries by European institutions are examples of bond investors voting with their feet.

4. Red Light for Corporate Credit Survival

Besides looking at Treasury bonds, you also need to compare the yield spread between Treasuries and corporate bonds.

Treasuries are seen as non-defaultable, but corporations can default. When market conditions deteriorate, investors sell corporate bonds, causing corporate financing costs to rise sharply relative to Treasuries. Once this spread widens rapidly, it indicates the market believes the probability of corporate default is increasing, and credit conditions are tightening. This is also an early signal of cracks in the real economy.

You can see the chart below, which shows the annual change rate of the S&P 500 Index and the change in the spread between the Moody's Baa-rated (investment-grade) corporate bond index and the 10-year U.S. Treasury yield. Widening spreads are often accompanied by lower annual returns in financial markets.

Summary

The core of our investment often isn't studying how to make money, but understanding the cost of money.

The U.S. Treasury yield is the fundamental cost of capital in this world. When this number fluctuates violently, try asking yourself: If the world's safest assets are being sold off, or being frantically bought up, what are the funds behind this worried about? This often tells you more about the relevant logic and truth than any stock commentary.

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