Alarm bells ring, everyone reduces their positions together

Source: Wall Street Intelligence Circle

Everyone is waiting for Monday’s market open.

From the market itself, the most dangerous thing is not a stock market drop, but bonds "losing control"—the sudden surge in global government bond yields is the real landmine this week.

For example: The U.S. 10-year Treasury yield jumped 13 basis points in one day to 4.38%; the UK 10-year government bond yield is approaching 5%, hitting its highest level since 2008, even higher than during the “Lettuce Truss Crisis.”

Government bond yields are the foundation for global asset pricing. Whether people are trading AI, gold, U.S. equities, or growth stocks, it’s all based on one premise—interest rates must remain stable. Once bond yields start to jump sharply, rapidly, and unpredictably, the entire market gets frightened. Because this means future financing costs will be higher, equity valuations will be compressed, and all high-leverage trades become risky—risk models will start to trigger warnings, forcing institutions to cut positions.

So this time, the most dangerous thing is not just a “stock market decline,” but the bond market—which is usually supposed to stabilize everything—starting to go off the rails itself.

Why did yields suddenly spike like this?

· First, war has pushed up oil prices, which in turn drives inflation concerns (that goes without saying).

· Second, the Federal Reserve showed a hawkish stance this week, shattering the “central bank safety net” illusion. This led the bond market to further sell-off, and yields kept surging.

· Third, many funds previously made a popular trade, betting that short-term and long-term rates would change according to some pattern. But now the market is not following the script at all, causing these positions to begin losing money. After these losses, they are forced to close positions. And once a wave of forced liquidations starts, it’s not “I’m bearish, so I sell,” but “I don’t want to sell but have to.” This kind of passive forced liquidation is often more terrifying than active selling.

The scariest term for the market now is a VaR shock.

Simply put: when risk systems collectively trigger warnings and force everyone to cut positions.

Many large institutions don’t trade based on feelings, but based on risk control models. When yields move too fast and too sharply, the models automatically judge that portfolio risk has exceeded tolerance, so positions must be reduced. Not only do they sell bonds, but also stocks, credit bonds, commodities, and even anything with liquidity. True crashes are not just because “fundamentals suddenly turned bad,” but because price volatility triggers risk control, people are forced to sell, causing larger volatility, which then forces more people to sell. This is the so-called “cascading liquidation.”

We're not at the worst moment yet, but it's getting close. What can truly collapse the market is not just high rates, but the speed at which those rates rise. If the 10-year U.S. Treasury yield surges another 20 basis points or so, then we might be hitting a real “2 standard deviation shock,” and at that point, the market may experience even more severe systemic downside.

If it’s just bad sentiment, the market can endure; but if there’s more risk control-driven position reduction, leveraged unwinding, and fund passive selling, things could suddenly get very ugly.

So, what could really break the market is the oil price–inflation–interest rate–forced liquidation chain.