Article By Maksym Skotarenko
The reaction of the US stock market to May's Non-Farm Payrolls report was, to put it mildly, counterintuitive to a non-finance professional reader. The US economy added 172,000 jobs, more than double the forecast of 85,000. Markets responded by selling off sharply. The S&P 500 fell 2.6%, the Dow Jones Industrial Average dropped a more modest 1.35%, and the tech-heavy Nasdaq tumbled 4.2%. Gold, silver and Bitcoin also sold off, leaving investors with nowhere to hide. President Trump took to social media declaring that stocks should go up on good jobs news, not down. On the surface, he was right, as in ordinary times, a booming labour market means a healthy economy, and a healthy economy means rising markets. However, we are not in ordinary times. Whilst correlation does not necessarily imply causation, hints of an explanation for why markets sold off may be found in the sovereign bond market, and the transformation it is undergoing.
Governments borrow money by issuing bonds. The interest rate they pay is the price of money itself. When yields are low, money is cheap as businesses expand, households buy homes, and investors take risks. When yields rise, the logic reverses. For four decades, yields were on a falling trajectory. The United States ten-year Treasury bond yielded 15% in 1981. By 2020, it had fallen below 1%. Germany's equivalent, the ten-year Bund, turned negative, meaning investors literally paid the German government for the privilege of lending it money. Japan maintained near-zero rates so long they became structural, a permanent feature of an economy struggling to combat stagnation and deflation — what many economists refer to as the lost decades. History shows this was not the norm, but rather a period in a multi-decade cycle that has a tendency to turn.
Today, the US ten-year yield sits at around 4.5%, Germany's Bund has crossed 3%, having risen sharply from negative to positive in the space of three years, whilst Japan's ten-year yield has climbed to 2.5%, a level not seen in decades, as the Bank of Japan finally abandoned its long-held yield controls. Three of the world's largest bond markets are moving sharply and simultaneously in the same direction, reflecting a shift in the economic, geopolitical and social environment we are living through. And here, economic history offers some perspective on where we stand.
Over the past two centuries, economies have moved in long cycles lasting forty to sixty years — from the age of steam to the age of oil to the age of the internet. Economists call these Kondratieff Waves, named after Russian economist Nikolai Kondratieff. Each epoch rhymes with the last: new technology creates a boom, raw materials grow scarce, governments overspend, deficits surge, bond markets demand higher yields, and inflation embeds itself into the system. Central banks find themselves in a trap, needing to raise rates to fight inflation, but knowing the political and economic cost of doing so. Zooming out from the daily headlines, one could argue we are living through precisely such a collision now.
Today, more than three months into the conflict between Iran, the United States and Israel, the price of crude oil fluctuates between $85 and $110 per barrel, a range that shifts with every headline from the negotiating table, approaching levels last seen in 2022 during the early stages of the war in Ukraine. The price of a gallon of diesel in America has surged from $3.60 to $5.30 in a matter of months, a number not only closely followed on Wall Street but felt by every household, moving through every supply chain onto every supermarket shelf. Annual headline inflation in the United States reached 3.8% in April, well above the Fed's 2% target. European governments are rearming at scale, committing defence budgets that had been hollowed out over thirty years of relative peace. Meanwhile, the era of cheap Chinese manufacturing that suppressed inflation across the developed world for a generation is ending as supply chains shorten and strategic decoupling accelerates.
And then there is the debt. The United States added $3.6 trillion to its national debt in just eighteen months, pushing the total to $39.1 trillion by March 2026. More debt means more bonds, which pushes yields higher still, which grows the interest bill further, a feedback loop with no clean exit. As macro analyst Lyn Alden has argued, we are entering an era of fiscal dominance, where the scale of sovereign debt begins to constrain the independence of central banks tasked with fighting inflation. This is already being reflected in central bank behaviour: for the first time in modern history, foreign central banks now hold more gold (24%) than US Treasuries (21%) in their reserves, a significant repositioning by the world's institutions.
Which is why last Friday's jobs number hit markets so hard. The Federal Reserve had cut interest rates six times between late 2024 and late 2025, justifying the cuts by pointing to cooling inflation and a softening labour market. A jobs report of nearly double what economists forecast changed the narrative instantaneously — in this world, good economic news is bad news, because higher rates mean tighter borrowing conditions and make future earnings worth less today. Money markets now price in two rate increases by early 2027. At the start of the year, they priced in four cuts. Margin debt has hit record highs as a share of the economy, and investors who borrowed to buy are now being forced to sell, amplifying every move downward.
The forty-year era of falling rates was built on conditions that no longer exist: global peace, globalisation, cheap commodities, and fiscal restraint. Those conditions have reversed structurally, and bond markets are the first to reflect it. The next few Fed meetings under newly appointed chair Kevin Warsh will be closely watched, but will not alter the structural trajectory, whether the next move is a cut or a hike.
Maksym Skotarenko is a Research Analyst and Portfolio Manager at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd, with registered address Finance House, Princess Elizabeth Street, Ta Xbiex, Malta XBX 1102, is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.