Global conflict and high oil prices are driving up inflation and deficits, causing a broad decline across all bond classes, particularly longer-duration Treasuries.

High-yield assets like JNK are falling more than Treasuries because they reflect "equity-like" recession risks in addition to rising interest rates.

Crude oil is currently a primary market driver, maintaining a strong negative correlation (0.72) with the SPY and high-yield credit, while higher-quality bonds (LQD) remain less affected.

Global disruptions fueled by the ongoing war have left virtually no asset class unscathed. The market narrative is dominated by two stories: oil-driven inflation and its secondary effects, both of which are driving yields higher.

Additionally, heightened wartime spending and ballooning deficits continue to push yields upward. Finally, the potential for a recession threatens to undermine credit products.

Fixed income markets have retreated broadly in response to these concerns. Within Treasury ETFs, long-duration instruments have underperformed significantly as a function of their interest rate sensitivity.

High-yield credit has seen sharper declines when adjusted for duration, reflecting the "equity-like" risk profile of lower-rated issuers. The divergence between credit and Treasury ETFs signals that markets are not only pricing interest rate risk but also mounting recession and equity risk.

According to S3 Short interest analytics, most funds remain stable, but JNK Short interest of float has surged by 42 . JNK serves as a proxy for high-yield debt, a sector that is acutely sensitive to both inflation and recessionary pressures.

While JNK’s 1.78 nominal move appears modest, it emerges as the largest mover on a duration-adjusted basis—a clear sign of increasing inflation/recession risk.

JNK now serves as a critical indicator for this joint inflation/recession risk. By comparison, HYG’s short interest is only up 8 , despite its similarity to the JNK portfolio.

The accompanying graph demonstrates the extent to which crude oil is driving market volatility this month. The SPY maintains a strong negative 0.72 daily correlation with energy prices.

JNK and HYG exhibit nearly identical correlation profiles. LQD, representing higher-quality investment-grade debt, remains less sensitive to these shifts.

The Treasury complex remains correlated but to a lesser degree. Its movements reflect shifting interest rate expectations rather than immediate concerns over corporate profits or macroeconomic recession.

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