Fu Peng: Is a U.S. Treasury breakthrough imminent? Key signals at the end of the converging triangle: decoding the transmission from U.S. Treasury volatility to U.S. stock volatility

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The Most Important Focus of the Second Half of 2025

>>This article represents the author’s views only. Click on the video above to watch! This video was recorded on September 6, 2025.

See the world from the trading desk, Fu Peng comments on finance.

In this episode of “Fu Peng Says”, I will focus on the most important core issue for the next half year: U.S. Treasury volatility vs. U.S. equities volatility. From a macro perspective, especially regarding the U.S. stock market, I believe the main logic to watch remains the mechanism through which bond market volatility transmits to equity markets. The importance of this relationship can be clearly seen in the chart on the left, which illustrates why the coming six months is a key window period.

Looking back to 2020, U.S. Treasury yields entered an upward channel; since late 2022, the 10-year U.S. Treasury yield has formed a converging triangle, and this chart pattern is now very clear. From a technical perspective, the next six months represent the final stage of this converging triangle—whether yields eventually break up or down, the key signal is a rise in bond market volatility, a judgment that can be tracked quantitatively through the MOVE Index (U.S. Treasury volatility index).

1. The Converging Pattern of Treasury Yields and Volatility Trends (2022–2025)

Over the past three years from 2022 to now, the 10-year U.S. Treasury yield has fluctuated around a median axis of about 4.3%–4.4% (green line in the chart). Within this cycle, two key features stand out:

Persistent convergence: The 4.3%–4.4% median has held for three years, with the converging triangle narrowing, indicating diminishing disagreement on yield direction, as the market awaits a key variable to break the balance.
Consistent decline in volatility: U.S. Treasury volatility (MOVE Index) has declined steadily for nearly three years, recently reaching a relative low. All these signals point to the same logic: potential rises in bond volatility will impact the equity market via cross-market transmission, in turn affecting U.S. equities volatility.

2. The Core Logic of Transmission From Bond Market Volatility to U.S. Equities: The Numerator–Denominator Approach

In the equity market framework, the numerator represents corporate earnings, and the denominator stands for the discount rate (directly linked to bond yields). Bond market volatility transmits to U.S. equities in the following ways:

If Treasury yields rise: This directly lifts the denominator (discount rate), putting pressure on stock valuations, which negatively affects U.S. equities. This is the “denominator transmission path.”
If Treasury yields fall sharply: Attention must turn to the numerator (corporate earnings) – a yield drop accompanied by heightened recession risk will weaken earnings expectations, also sparking volatility in U.S. equities. This is the “numerator transmission path.”

This cross-market relationship was mentioned years ago in the reopening-themed sharing. It’s vital to note that “declining yields are good for stocks” is not absolute—if recession risks outweigh expectations for lower rates, the negative impact on the numerator (earnings) will offset the positive effect on the denominator (valuation), leading to greater volatility in equities.

3. The Core Contradiction Facing U.S. Equities: Valuation and Volatility Concerns

Looking at the right-side chart, from 2022 to 2025, bond and stock market volatility both trended downward, but beware the structural change after the 2024 “Nvidia flash crash”: since then, U.S. equities, especially those in the AI industrial chain (Nvidia as the core) and software sectors, have entered a highly valued (“expensive”) phase.

High valuations bring two main challenges:

Greater need for earnings support: High valuations must be matched by stronger top-line growth; if earnings disappoint, valuation bubbles can easily burst.
Higher sensitivity to the discount rate: Elevated valuations are more sensitive to denominator (discount rate) changes, so even minor Treasury yield moves can trigger re-pricing in U.S. stocks.

In the market, current U.S. equities volatility is less stable than in 2023–2024, which matches the marginal weakening of employment data. From both the numerator (earnings expectations) and denominator (discount rates), current market stability is not as firm as before.

4. The Relationship Between Fed Policy Shift and Treasury Yield Convergence: From “Observation Period” to “One-way Target”

The formation of the three-year Treasury converging triangle is intimately linked to phases of Fed policy, which can be divided into three stages:

November 2023: Hikes shift to Observation: The Fed moved from rate hikes to neutral observation, marking the entry of 10-year Treasury yields into the converging triangle; the market began to anticipate subsequent policy moves.
July 2024: Observation period to Dual Targets: Policy focus expanded from inflation only to “inflation + employment” dual balance, starting the first ABC wave in the triangle, making the market more sensitive to macro fundamentals.
August 2025: Dual to One-way Target: According to Powell’s remarks and related analysis (“Micro Plus Diary”), the Fed has downplayed the inflation objective, focusing only on jobs; the triangle narrows further, approaching its endpoint.

Additionally, the April 2025 tariff policy briefly pushed Treasury yields lower. Both the July 2024 drop in yields and the April 2025 tariff event triggered “volatility transmission from Treasuries to stocks”; this is a pattern to watch closely.

5. The Gap Between Market Expectations and Actual Trends: Lessons from Overnight Index Swaps (OIS)

OIS-implied expectations show that the market has repeatedly seen “spike then fall” patterns for Fed policy in the past three years:

November 2023: Policy shift drives strong rate-cut expectations, which fade quickly;
July 2024: Dual-target policy reignites cut expectations, again unfulfilled later;
April 2025: Tariff shock drives a new wave of cut expectations, which ultimately fizzles.

It’s important to note that despite repeated forecast changes, there was never “hiking expectations” (the implied rate never broke above 0), showing long-term consensus for dovish Fed policy, with disagreement only over “timing and amplitude” of easing.

6. Core Variables Now: Judging the Nature of Jobs Data and Policy Shocks

Breaking the convergence in Treasuries ultimately depends on two variables: employment deterioration (driving yields down) or unexpected inflation (driving yields up). With the Fed now focusing one-sidedly on job data, employment is the key to watch.

Unemployment rate trend: U.S. unemployment since the pandemic was at a low of 3.5%, rising to 3.8%–3.9% in October 2023, 4.1%–4.2% in July 2024, now at 4.3% and steadily worsening.
Initial jobless claims: Since late 2022, 4-week average initial claims have cycled between 200k and 250k, matching well with the converging triangle; risks are rising for a move above this range.

Furthermore, new policies (tariffs, immigration, government job cuts) after the 2025 Trump administration may affect the labor market in unknown ways: if the shock is short-term, convergence may persist; if long-lasting, balance will break. By sector:

Government employment: Government job cuts lower stability;
Retail and services: Market expectation swings in November 2023 and July 2024 were linked to retail numbers; currently stable but require monitoring.

ADP and non-farm job data also show repeated expectation cycles: in October 2023 and July 2024, weak data sparked rate cut hopes, but subsequent rebound erased those. This cycle has suppressed volatility while building potential risks.

7. Strategy: Focus on Data Certainty, Anchor to Volatility Signals

Based on the above, the core market strategy now should revolve around data certainty, rather than chasing short-term expectations. Specific approaches:

De-emphasize short-term expectation swings: As history shows, chasing such sentiment can be lagging (e.g., in 2023 the market expected 10-year yields breaking below 4 to drop further to 3, 2, 1, but they returned to the convergence range). Avoid being led by such noise.
Anchor to job data quality and trend: Distinguish whether current changes are “short-term policy shock” or “long-run trend”; only the latter breaks the pattern.
Keep a close eye on bond volatility signals: Rise in the MOVE Index and breaking the Treasury triangle (up or down) are key cross-market transmission signals—if breaking down, assess numerator (earnings) impact on equities; if breaking up, note denominator (valuations) pressure.

Currently, the cross-market transmission is entering a new key point, the fourth such point since late 2022, at the triangle’s endpoint. Whether the outcome comes quickly or is delayed depends on subsequent job data and policy developments.

In summary, by reviewing the logic of Treasury-equity linkage over the last three years, Fed policy shifts, and labor market trends, we can grasp the current market’s core contradiction and potential risks. The above analysis is intended to help you understand the market dynamics. Thanks for listening; see you next time.

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Risk Warning and DisclaimerThe market involves risk, investment should be cautious. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situation, or needs of any user. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their specific situation. Investment based on this is at your own risk. ```