The global long-term bond market has seen panic selling, with the yield on the US 10-year Treasury rising 22 basis points in a week and the 30-year yield increasing by 23 basis points. The US Treasury's market intervention has once again been lukewarm, emboldening speculators to short-sell aggressively, causing consecutive sharp declines in the prices of 30-year long bonds in the US, Japan, France, the UK, and Germany. Market expectations for the US Federal Reserve's higher-for-longer interest rate policy have deepened, and the US dollar index has risen. Stock markets, however, have reacted surprisingly calmly, with US equities leading most markets higher. Crude oil prices saw profit-taking, while gold and silver lost their safe-haven appeal and weakened along with liquidity. US President Trump likes to boast that the US economy is the "hottest economy in the world," and this time he may have gotten his wish—economic data is indeed strong, but the bond market has consequently collapsed. The yield on the US 10-year Treasury has broken through the psychological barrier of 5.2%, while the 30-year Treasury yield has risen above 5.5%, reaching the highest level since 2004; the average US 30-year fixed mortgage rate has surged to 7.45%. In my view, the bond market has already raised alarm signals. The immediate trigger for the latest long-bond sell-off is that consumer confidence and composite PMI indices remain high, indicating the economy is still expanding with no sign of recession. The market believes the Fed will need a longer hiking cycle and a higher policy rate. At the recently concluded FOMC meeting, policymakers projected one more 25-basis-point rate hike this year, but the bond market has turned more pessimistic—interest rate futures now price in three additional hikes totaling 75 basis points over the next year. Strong economic activity is not exactly news. The Atlanta Fed's GDPNow model had already predicted a 5% GDP growth for the US in the third quarter of this year, indicating economic activity has not truly slowed. Looking deeper, the US economy is experiencing a K-shaped development: consumers invested in AI stocks are spending freely, while middle- and low-income households without stock market exposure struggle with rising living costs. Investment across most US industries remains unimpressive, but capital expenditures related to AI are not only massive but accelerating. Compared to economic activity, inflation is more concerning. Prices have not spiraled out of control, but the pace of disinflation is indeed slower than expected. With a new Fed chair committed to bringing inflation back to target, and amid high oil prices, insufficient fuel production, and no end in sight to the US-Iran conflict, policy rates remain in a state of high uncertainty. More importantly, liquidity has begun to reverse. For most of the period since 2008, quantitative easing kept the economy awash in excess liquidity, with low funding costs, stock buybacks by listed companies, and financial institutions eager to leverage. But now everything has changed. With fiscal policy out of control, the government faces immense pressure and rising costs in bond issuance. Coinciding with large-scale bond issuance by AI companies, the supply-demand equilibrium in the long-term bond market has been disrupted, and foreign appetite for US Treasuries has cooled rapidly. Major central banks, led by the Fed, have shifted from QE to QT, tightening monetary policy. The bond market is highly volatile, and although I currently do not see a specific catalyst that could trigger a liquidity chain reaction, the undeniable fact is that financial conditions are clearly deteriorating. Mortgage rates have broken out to new highs, government bonds and AI compete for funding, uncooperative central bank policies, and uncontrolled energy prices have turned the $32 trillion US Treasury market into a gas station filled with fuel and gas—just one spark could set off a chain of explosions. The US stock market has reacted indifferently to the bond sell-off, even recording gains last week. The rise in US equities has been driven mainly by tech stocks, especially AI-related ones, which are far less sensitive to interest rate environments than cyclical stocks. Most of these companies also have strong earnings outlooks, making the decoupling between stocks and bonds somewhat understandable. However, AI infrastructure companies are burning cash at an alarming rate, with capital expenditures expected to reach $2 trillion next year, far beyond what free cash flow can support. AI debt competes with government bonds for funding, exacerbating liquidity shortages. It's not just US bonds that are in trouble—French, British, German, Italian, and Japanese bonds are also being sold off simultaneously, as investors clearly expect yields to rise. European countries face structural economic decline, inability to reduce fiscal deficits, and political instability in many cases. In my view, France and the UK could even face debt crises. Bond markets are globally interconnected, central bank policies are relatively synchronized, and market sentiment is contagious. It has been seven months since the US and Israel launched military attacks on Iran. International crude oil prices have been rollercoastering, with a significant overall increase. However, the impact on global economic growth has been smaller than predicted by economists, including myself. According to calculations by independent consultancy Capital Economics, global economic growth in the second quarter of this year was essentially unchanged compared to a year earlier. The impact has been mainly reflected in prices. US crude exports have filled part of the gap, China has sharply reduced oil imports, and more Russian oil has entered the market, preventing a full-blown oil crisis. In the coming months, however, a fuel crisis could erupt. US diesel prices have hit a record high of $6.53 per gallon, rising much faster than gasoline prices. Trump suggested last week restricting diesel exports, and although the White House denied any such plans in the near term, given diesel's significant impact on agriculture, transportation, and heating, the mention of such a policy before the midterm elections is unlikely to be baseless. The Middle East conflict and the Russia-Ukraine war have not only weakened crude oil production and transportation capacity but also severely damaged key petrochemical and refining facilities in the region. According to the International Energy Agency, 40 to 80 critical energy facilities in nine Middle Eastern countries have suffered severe damage. In recent months, 28 of Russia's 32 largest refineries have been hit by Ukrainian drone attacks, with 30% to 45% of refining capacity paralyzed. Restoring normal refinery operations typically takes at least a year—meaning a fuel crisis is quietly emerging. Diesel, aviation fuel, naphtha, liquefied gas, as well as synthetic ammonia and nitrogen fertilizers, will be hit first. Shortages of these essential goods could lead to severe supply gaps this winter. For developed countries, this means higher prices; for developing countries, it could mean supply disruptions and potentially impact agricultural production. This week's focus is on two US data points: 1) August PCE, forecast to rise 0.4% month-on-month and 3.7% year-on-year; core PCE expected to rise 0.3% month-on-month and 3.3% year-on-year. Persistently high inflation adds pressure on the Fed to hike rates in October. 2) September non-farm payrolls, expected to add 90,000 jobs (previous: 162,000), with average hourly earnings rising 0.3%, unchanged from last month. Also watch for ECB President Lagarde's speech at the European Parliament, the Bank of Japan's September meeting minutes, and the Eurozone PMI. Tao Dun World *This week's article reflects the author's understanding and views on the economy, policy, and markets. It represents personal opinion and is not investment advice or solicitation. *Articles published in Economic Link, signed or unsigned, represent the authors' personal opinions and do not reflect the position of Economic Link. Economic Link serves as a platform for free expression.