An important signal of the market’s returning risk appetite! U.S. Treasury bonds see three consecutive gains amid cooling oil prices, heading toward the longest rally in a month

According to Zhitong Finance APP, due to the market's optimistic expectations that peace talks between the United States and Iran will promote the resumption of oil tanker transportation around the Arabian Peninsula, international oil prices benchmarks—Brent crude oil and WTI crude oil prices—have both dropped significantly in recent days. U.S. Treasury trading prices have also been notably boosted as oil prices and inflation expectations cool, with the potential to set the longest winning streak in a month. In terms of the stock market outlook, the short-term trend may see a technical risk appetite recovery jointly driven by falling oil prices and a retreat in the 10-year U.S. Treasury yield, but this is still insufficient to confirm a return to a universal global equity bull market.

Dubbed the "anchor for global asset pricing," the 10-year U.S. Treasury yield has fallen for three straight days, continuing its downward trend before the U.S. stock market opened on Tuesday, dropping 3 basis points to 4.62%. Its premium over the two-year Treasury yield, which is most sensitive to the Federal Reserve's monetary policy, has also narrowed to its lowest level in nearly four weeks.

As shown in the chart above, U.S. Treasuries are approaching their longest winning streak in a month—as international oil prices continue their decline, the 10-year Treasury yield falls for a third consecutive day.

The improving outlook for U.S.-Iran talks is rapidly compressing the geopolitical risk premium on crude oil, and by lowering energy inflation expectations, is driving a continuous rise in U.S. Treasuries. Brent crude oil has dropped from over $100 per barrel last week to around $86, while the 10-year U.S. Treasury yield has fallen to around 4.62%. However, the premium of the 10-year over the 2-year yield has narrowed simultaneously, indicating that this move is closer to a "bullish flattening" driven by a decline in long-term inflation premiums and increased demand for safe-haven assets, rather than a full market bet on the Federal Reserve returning to a loose monetary policy cycle.

Notably, the probability priced into the rate futures market for a 25 basis point rate hike by the Federal Reserve this week remains close to 40%, while economists' baseline expectations generally point toward the Fed maintaining its benchmark rate unchanged this year, further illustrating that the bond market is merely scaling back some "oil price out of control" pricing and has not yet confirmed that tightening risks are fully eliminated.

The 10-year U.S. Treasury, as the risk-free rate anchor on the denominator side of the DCF stock valuation model, if it remains persistently high, the ongoing super bull market around AI will not necessarily end, but it will face short-term downward correction pressures, and there may be a further shift from a "valuation expansion bull market" to an "earnings validation bull market." Rising yields will sharply compress valuations of high-duration assets such as high-PE semiconductors, AI software, unprofitable AI infrastructure, fuel cells in the energy sector, quantum computing, and space technology. However, for leading tech assets that already have locked-in orders, pricing power, buyback capabilities, and cash flow, the impact will be more of a phase adjustment rather than a collapse in their industrial logic.

Falling Oil Prices Support Long-Term Bonds, U.S. Treasuries Achieve Best Winning Streak in a Month

The latest trading data shows that the improving outlook for U.S.-Iran negotiations is rapidly compressing the geopolitical risk premium of oil prices, and by reducing energy inflation expectations, driving a sustained rally in long-maturity Treasuries of 10 years and beyond. Brent crude oil has slipped from over $100 per barrel last week to about $86 now, and the 10-year U.S. Treasury yield has retraced to around 4.62%.

"This optimistic trend in long-maturity Treasuries over 10 years shows that investors are still unwilling to entirely eliminate risk premiums associated with a resurgence in inflation pressures, nor are they ready to dismiss the possibility that the world's major central banks may ultimately need to maintain restrictive policy for longer," said Evelyn Gomez-Recheti, a multi-asset strategist at Mizuho International.

Forward rate swap contracts tied to the date of the Federal Reserve's FOMC meeting indicate that the probability the Fed will raise rates by 25 basis points this Wednesday Eastern time is over one-third, approaching 40%.

"This is very unusual," said Laura Cooper, a senior macro credit officer at Nuveen Administration Ltd, in a media interview. "Looking back over the last ten years or so, FOMC members at the Fed have typically provided ample forward guidance on potential policy actions, so now investors have to adjust to this new monetary policy regime under Waller, where the Fed no longer offers forward guidance."

She said the Federal Reserve may now "sit tight for a while," but she still "leans toward the view that there is no need to take a rate hike stance again this year."

The U.S. ADP employment data to be announced later could provide clearer clues about the employment outlook. The four-week figure as of July 11 currently does not have median economist forecasts, although the previous period unexpectedly increased by 16,500. U.S. Conference Board consumer confidence data is expected to show the consumer confidence index rising from 91.2 in June to 92.4 in July. The U.S. Treasury will issue $44 billion of new seven-year bonds, and the market's acceptance and demand for the new offering should also be closely watched by investors.

In pre-market trading on Tuesday, Brent crude oil prices fell 2.3% to $86.28 per barrel; the benchmark had climbed above $100 per barrel last week, hitting a two-month high.

Global Stock Markets Enter the “Discount Rate Recovery + Earnings Quality Verification” Stage

On the financial market trading and pricing level, the 10-year U.S. Treasury yield is undoubtedly the "anchor for global asset pricing." Should this yield indicator continue to rise for some time, driven by stronger inflation expectations and larger-scale fiscal stimulus "term premium" factors, and approach the psychologically significant level of 5%, it will directly raise the risk-free rate in DCF quantitative valuation models for risk assets. Consequently, the still unprofitable hot tech and growth stocks, momentum names closely related to the AI computing power theme, high-yield corporate bonds, and the broader cryptocurrency asset valuations may face shrinkage or even collapse. Furthermore, if the 10-year U.S. Treasury yield continues to rise amid inflation rather than growth improvement, corporate profit margins will be further squeezed by energy, labor and financing costs.

Theoretically, the 10-year U.S. Treasury yield is equivalent to the risk-free rate indicator r on the denominator side of one of the most important stock market valuation models—the DCF model. When other factors (especially numerator-side cash flow expectations) do not change noticeably—such as during earnings season, when the numerator side lacks positive catalysts and is in a vacuum—if the denominator remains elevated, valuations for high-flying tech stocks, high-yield bonds, and cryptocurrencies closely linked to AI are in danger of collapsing.

For global stock markets, a simultaneous decline in oil prices and long-term bond yields is generally beneficial for high-valuation tech stocks with long durations that rely on discounted future cash flows. In the context of continued declines in oil prices, relatively low energy prices can also significantly ease corporate cost and real household income pressures, while lower risk-free rates improve the present value of corporate future cash flows. Therefore, short-term market action may see a rapid technical risk appetite recovery driven by falling oil prices and lower Treasury yields, but this remains insufficient to confirm a broad-based global equity bull market.

Tech leaders with ample free cash flow, high AI monetization realization, and independence from external financing will outperform computing power projects relying on future demand, high leverage, or customer financing for growth; non-essential consumption, industrials, transportation, and some rate-sensitive assets may benefit from declining energy costs, while oil producers and high-beta semiconductors are still facing downward earnings revisions. Moreover, the real determinant of whether the market can transition from a rebound to a new uptrend is not Brent dropping below a certain level, but whether the Federal Reserve pauses rate hikes and whether AI capex giants like Microsoft, Meta, and Amazon can simultaneously prove revenue growth, capital efficiency, and free cash flow recovery.