Insights 
VT 
The Dow Jones Industrial Average saw a rebound on Thursday after a downturn earlier in the week. Concerns over the US government’s growing debt surfaced, leading to a rise in bond yields and a drop in stock markets. Despite these issues, stocks rose as the federal budget and taxation bill was approved, which may increase the deficit in the coming years.
Bond Market Uncertainty
The bond market is uncertain, restraining the Dow Jones from a complete bullish turn. The 30-year Treasury yield remains above 5%, while the 10-year yield stays above 4.5%. These yield levels pose challenges to the administration’s financial strategies amidst planned tax cuts.
Recent data from the Purchasing Managers Index (PMI) for May suggests rising optimism among business operators. The index’s components for Services and Manufacturing increased to 52.3 from previous lower values, indicating expansion in these sectors.
On Thursday, the Dow Jones tested its 200-day EMA near 41,640 before recovering to over 42,000. Though the price trend remains generally positive, recent declines have slowed its progress. The S&P Global Manufacturing PMI, a monthly measure of manufacturing activity, showed a reading of 52.3, pointing to growth in the sector.
What we’ve seen over the past few trading sessions is a recurring struggle between mounting fiscal concerns and pockets of resilience in the economic data. The earlier slump in the Dow, triggered by apprehension around spiralling government debt and surging long-dated Treasury yields, was partially reversed following Congressional approval of the latest budget and taxation measures. This legislative move, while providing short-term relief, potentially adds to future deficit pressures, particularly as fiscal expansion continues without firm revenue offsets.
Implications Of Rising Treasury Yields
Importantly, the move in Treasury yields — with the 30-year holding firm above 5% and the 10-year clinging tightly to 4.5% — creates an uphill battle. Financial conditions are tightening because of these rates. They don’t just weigh on equity valuations; they directly impact borrowing costs, which in turn can dampen investment appetite and suppress corporate profitability. This has meaningful implications for options pricing and volatility profiles going into the next few weeks.
We’re watching this bond move carefully. When yields push higher, particularly on the long end, implied volatility tends to lift across broader asset classes. This doesn’t always trigger a sell-off in risk assets immediately, but it does adjust the pricing mechanics for premiums, particularly in longer-dated contracts. There’s a tangible cost to ignoring this shift. Any strategy reliant on long gamma needs to be reconsidered under this new rate regime, especially while the front end of the curve lags the long end’s aggression.
The turnaround on Thursday, where the Dow rebounded after touching its 200-day exponential moving average (sitting around the 41,640 mark), was partly driven by better-than-expected activity indicators. The upward move beyond 42,000 was technically sound, though it still faces considerable resistance. From a trend-following perspective, price action has not confirmed a sustained bullish pattern, mostly due to the lingering rate pressure which continues to cap upward momentum.
That said, the positive momentum in forward-looking economic readings shouldn’t be dismissed. The composite PMI figures, particularly the strong 52.3 showing for both Manufacturing and Services, point to a reacceleration in private sector activity. This is encouraging, especially when viewed alongside the week’s stabilisation in consumer expectations. However, this does not mitigate macro headwinds. If anything, it tightens the debate around monetary policy — higher activity may encourage central banks to delay rate cuts, which would put renewed pressure on yields, and, by extension, equity exposure.
Looking ahead, we’re preparing for higher volatility skew as sentiment swings between fiscal risk and economic resilience. For those in options markets, weekly positioning may need to lean more delta-neutral while maintaining flexibility for sharp moves, particularly on either side of key Treasury auction prints or employment data. Directional bets carry more risk than they did last month.
With the Dow flirting with its 200-day EMA, and spreads in the corporate space starting to widen slightly, risk management remains everything. There’s no comfort in relying on old correlations to hold. We’re also eyeing the knock-on effects on sector rotation, particularly in interest rate-sensitive equities which have not fully recalibrated to the higher-for-longer yield outlook.
Equally, while PMI strength offers some near-term stability to the growth story, further wage and labour data will be needed to cement that trend. Until then, spreads in both options and swaps should continue to reflect higher tail risk, especially on the downside. Mid-curve protection seems underpriced given the current setup.
In the weeks ahead, we’re balancing any optimism over economic momentum with calculated patience, and not rushing into duration-heavy trades. With rates where they are, and fiscal balances at the forefront of market concerns, timing remains vital.
