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

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

Author: Rhythm BlockBeats

Source:

Repost: Mars Finance

Editor’s note: When the stock market quickly recovers from declines and approaches historical highs, a narrative of “risks have been cleared” is re-emerging as the dominant story. But this article reminds us that if we only look at equity markets, it’s easy to misjudge the true current environment.

Signals from bonds and crude oil are inconsistent: rising interest rates, high oil prices, pointing to persistent inflation, limited Federal Reserve policy space, and unresolved geopolitical conflicts. In contrast, the stock market is pricing in low inflation, rate cuts restarting, manageable costs, and conflict easing—all highly idealized assumptions.

The author believes this rebound is driven more by momentum than fundamentals. Under the influence of “fear of missing out” trading behavior, prices can deviate from reality in the short term, but ultimately must revert to ranges determined by macro variables.

When discrepancies appear between different asset classes, the real risk is not who is right or wrong, but how these discrepancies are resolved. The current issue is not whether the market is optimistic, but whether this optimism is already ahead of the data.

Below is the original text:

“Rule Two: Excessive volatility in a single direction often triggers an overreaction in the opposite direction.” — Bob Farrell

The S&P 500 has fully recovered all its losses during the US-Iran conflict. As of yesterday, the index was 1% higher than February 27 (the day before the first strike on Iran), just a hair away from a new all-time high (less than 1%).

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

Honestly, if you only look at the stock market now, everything seems to be “back to health.” War breaks out, markets decline, then rebound quickly, everything returns to normal, and everyone moves forward.

But if you broaden your perspective, this is not the true situation unfolding.

The bond market has not confirmed this rally.

The oil market has not confirmed this rally.

When the two most important markets globally are telling stories different from the stock market, it is a signal that cannot be ignored.

So, what is the stock market actually pricing in?

For the S&P 500 to be above pre-war levels, the market must simultaneously believe that:

• Current oil prices are not enough to materially suppress consumption
• The Federal Reserve will ignore overheated inflation data and still cut rates
• Higher raw material and transportation costs will not erode corporate profit margins
• The Middle East conflict will be close to resolution within six months, thus no longer posing a risk

Perhaps things will develop this way. I am not saying it’s impossible. But these are quite aggressive assumptions, and the data from bonds and oil markets do not support these hypotheses.

From a fundamental perspective, the stock market’s pricing is already close to “perfect expectations.”

Let’s look at more specific data:

On February 27, the day before the conflict erupted, the closing levels of key indicators were as follows:

• 10-year U.S. Treasury yield: 3.95%, which rose to 4.25% yesterday, up 30 basis points from pre-war levels
• WTI crude oil: $67.02, roughly 37% higher than at that time
• 2-year U.S. Treasury yield: 3.38%, which closed yesterday at 3.75%, nearly 40 basis points higher than pre-war

Now, let’s analyze what these changes imply.

The 30 basis point increase in the 10-year yield after the war started is not because the bond market is more optimistic about economic growth. Consumer sentiment is weakening, confidence remains fragile. This yield increase essentially reflects the bond market “quietly” pricing in inflation.

The signal is clear: higher oil prices are transmitting into the overall price system, and the Fed’s future policy space may not be as loose as the stock market assumes.

Oil prices have risen 37% in six weeks, which is not what one would expect if traders truly believed a genuine, lasting agreement between Iran and the US was imminent.

If traders were confident in a stable ceasefire, oil prices should have already fallen back to around $70 and continued downward. But that’s not the case. Oil prices remain high, indicating the oil market is not pricing in the same “conflict resolution” expectations as the stock market.

Similarly, the 2-year Treasury yield remains 40 basis points above pre-war levels, directly challenging the narrative of imminent Fed rate cuts.

The 2-year yield is the most sensitive indicator of interest rate expectations, reflecting the Fed’s policy path more directly than any other asset. Currently, it signals that the Fed’s room for maneuver is smaller than the market thinks. This will impact almost all valuation logic supporting this rally.

So, who is right?

The stock market might be correct, I am willing to admit that. If a substantial ceasefire is reached, bond yields could fall sharply; if supply issues are credibly resolved, oil prices could drop significantly. This is not the first time stocks lead, and other markets “catch up” or follow later.

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

Much of this rally is driven not by fundamentals but by momentum. Traders are reluctant to short in an upward trend, and this behavior can keep pushing prices higher. Such buying can sustain a rally longer than it should.

But it does not change the underlying logic.

The reality is: oil prices remain high, interest rates are still rising, and the Fed’s room to cut rates is more limited than the bulls need.

Fundamentally driven rallies tend to be more sustainable; momentum-driven rallies are usually more fragile and shorter-lived. When considering whether to add positions near all-time highs, this difference is crucial. As shown in the valuation chart above, the current stock market is pricing a “perfect scenario.”

My actual view:

The past 10 days have indeed seen some improvement, and I won’t deny that. I am not someone who blindly short-sells without reason.

But the gap between stock market pricing and the reality reflected by bonds and oil remains significant, and this gap has not narrowed. I am closely monitoring this.

Currently, the stock market is at the most optimistic end of the range; bonds and oil are closer to the middle, reflecting a world where inflation persists, Fed policy space is limited, and conflicts are not truly resolved.

This discrepancy will eventually be resolved, with only two paths:

• Either a real ceasefire is reached, oil prices fall back to around $70, the Fed gains clear room to cut rates, and the stock market proves to be correct;
• Or none of this happens, and the stock market declines, aligning more with the levels reflected in bonds and oil.

At present, bonds and oil show no signs of aligning with stocks; it seems more like the stock market needs to fall to “match” them.

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

If you continue to add positions at this level, you are essentially betting that everything will develop in the most ideal way: the war ends smoothly, without “Trump’s sudden remarks” interfering; inflation remains manageable; the Fed cuts rates as planned; corporate profits stay stable. All four conditions must be met simultaneously. Any significant deviation could lead to a rapid and sharp market correction.

In contrast, I prefer to stay patient rather than chase a rally that two major asset classes are “quietly denying.” If the long-term signals point to buying, we will naturally increase positions gradually according to our strategy.

And don’t forget— the only certainty is that everything will eventually change.