Friday's changes: crude oil continues to surge, US stocks drop again, but Treasury bonds are "not following," has the market started "pricing in a recession"?

As global crude oil prices continue to rise due to geopolitical conflicts and the U.S. stock market experiences a series of declines, U.S. Treasury yields unexpectedly dropped from high levels on Friday, breaking the recent pattern of rising in sync with oil prices and highlighting a shift in market pricing logic.

On Friday, amid the ongoing conflict between the U.S. and Iran, benchmark WTI crude futures surged to a multi-year high of $99.64 per barrel, while the NASDAQ Composite Index fell into correction territory. However, the U.S. two-year Treasury yield, which is highly sensitive to Federal Reserve monetary policy, fell to 3.90%.

This rare decoupling of asset movements indicates that the financial markets may be approaching a critical turning point. While investors briefly chased high-yield bonds this year, their core focus is rapidly shifting from the short-term inflation panic triggered by surging energy prices to deeper concerns about long-term economic stagnation or even recession.

As verbal interventions on oil prices gradually lose effectiveness and the pressure of U.S. fiscal debt begins to emerge, Wall Street is being forced to reassess the valuation framework of risk assets and the potential downside risks to the macroeconomy amid rising energy costs.

Decoupling of U.S. Treasury Yields, Growth Concerns Outweigh Inflation Panic

Market charts show that recent asset prices have exhibited a typical pattern of “high oil prices, low stock market, high yields,” but on Friday, U.S. Treasury yields significantly diverged from this trajectory. The chart clearly reflects that, while oil prices continued to rise and U.S. stocks faced sell-offs, Treasury yields did not rise as usual but instead experienced a notable decline, completing a clear logical decoupling.

In light of this abnormal phenomenon, the market has provided dual explanations. According to Bloomberg analysis, on one hand, after yields reached their highest levels since mid-2025, the elevated yields themselves attracted substantial buying interest, leading investors to question whether the energy crisis would genuinely trigger a counter-cyclical rate hike by the Fed.

On the other hand, a deeper reason lies in the deterioration of economic fundamentals. According to Bloomberg, Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, stated, “The front end of the Treasury yield curve is no longer viewing energy prices as a follow-on inflation risk, but is instead more focused on the risks of economic growth and risk assets.” ZeroHedge also pointed out that investors are shifting from concerns about short-term inflation to fears of long-term economic recession and ongoing supply chain disruptions.

Oil Prices Ignore Verbal Interventions, Supply Crisis Intensifies

The strong performance of the crude oil market is the core source of recent asset volatility. Although President Trump briefly extended the moratorium on attacks, which caused a temporary drop in oil prices, as the conflict in the Middle East entered its fifth week, the situation’s further escalation ultimately pushed oil prices higher.

According to ZeroHedge analysis, the substantial impact on the oil market is evolving from flow disruptions to inventory depletion. Market liquidity is deteriorating, with investors no longer pricing in a resolution to short-term conflicts but rather pricing in the escalation of the situation and tightening supplies. Goldman Sachs traders emphasized the limitations of verbal interventions, stating, “you can’t jawbone molecules.”

The shock from rising oil prices has triggered concerns about stagflation. John Briggs, head of U.S. interest rate strategy at Natixis, noted that as long as the Strait of Hormuz remains closed, investors will be worried about mid-term inflation and the possibility of central banks repeating aggressive tightening responses like those seen in 2022.

U.S. Stocks Under Pressure, NASDAQ Officially Enters Correction

High energy costs and ongoing macroeconomic uncertainty have severely impacted risk assets. The NASDAQ Composite Index dropped over 3% this week, officially entering a correction territory with a 10% decline from its historical highs, while the S&P 500 recorded its fifth consecutive week of declines, marking the longest losing streak since May 2022.

Technology stocks have become the hardest hit by the sell-off. According to Bloomberg industry research strategist Nathaniel Welnhofer, the recent pullback in tech stocks has reduced the NASDAQ’s forward P/E valuation premium relative to the S&P 500 to just 4.4%, the lowest level since January 2019, far below the 35.7% premium seen in October of last year.

The structure of the options market has also exacerbated the stock market’s vulnerability. ZeroHedge pointed out that as implied volatility rises, the market is in a negative gamma state, where higher volatility will trigger more passive hedging sell-offs, further amplifying the index’s decline.

Debt Issuance Pressure Emerges, Market Faces Dual Blow

In addition to the risks of economic downturn, the U.S. Treasury market also faces real pressures from the supply side. According to Bloomberg, Citigroup economist Andrew Hollenhorst pointed out that the prospect of increased borrowing by the U.S. government to address war costs and refinance debt at higher interest rates is creating upward pressure on Treasury yields. This week’s Treasury auctions cleared at yields above expectations, highlighting the severity of fiscal challenges during rising interest rates.

At the same time, market expectations regarding monetary policy have undergone dramatic fluctuations. TD Securities interest rate strategist Molly Brooks stated, “The market has made a complete 180-degree turn, with participants shifting from asking when the next rate cut will be to pricing in future rate hikes.”

Against this backdrop, investors have to find a balance between high inflation and weak growth. As Goldman Sachs analyst Tony Pasquariello summarized, the longer geopolitical conflicts drag on, the higher the market’s vulnerability to genuine growth panic.

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