Rising oil prices and elevated interest rates put pressure on the bond market

On Friday (2026-10-02) U.S. stocks closed higher, SPY rose 0.74%, QQQ rose 1.02%. But over the past week, SPY is still down 0.22% in total, QQQ is up 0.68%. Today is Monday; markets were closed over the weekend, so the new news accumulated over the weekend.

a tanker was attacked again, jobs data weakened, and long-term interest rates remain high. Taken together, ETF Radar is currently focusing on the line of interest rates and oil prices.

Start with the Middle East news over the weekend. Local time October 4, another tanker in the Strait of Hormuz was attacked. An Iranian Foreign Ministry spokesman said the current focus is on the strait issue and that the United States must come up with concrete measures to ensure the strait's security. The Iranian military also said it has decided to extend missile range. Meanwhile, as the US-Israel-Iran conflict spills over, the Houthi forces in Yemen and Saudi Arabia have been attacking each other continuously; the Yemeni government on the 4th announced the launch of military operations to retake areas recently controlled by the Houthis. Iran said it is willing to push the Houthis and Saudi Arabia to resolve the issue through dialogue.

The Strait of Hormuz is the throat of global crude oil transportation — to put it plainly, a very narrow waterway through which a significant portion of the world's oil supply must pass. With tankers repeatedly hit, shipowners will demand higher insurance and freight rates, and the market will worry about crude supply. Supply concerns push up oil prices, and higher oil prices push up inflation. When inflation rises, central banks are even more reluctant to cut rates. At the end of this chain lies the bond market.

There is a countercurrent here. On Friday the US crude oil fund USO fell 1.77% in a single day, indicating that short-term oil prices did not surge along with the tense atmosphere. However, it is still up 3.72% over the past month, so the major trend has not reversed.

Looking at employment. Data released on Friday showed the U.S. added only 29,000 jobs in September, market expectations were about 89,000, and the unemployment rate also rose. Normally, cooling employment increases hopes for rate cuts, which should benefit bonds. But the situation right now is perversely the opposite: the 10-year U.S. Treasury yield is about 5.24%, and the 30-year is reported to be about 5.46%, both at multi-year highs.

There are two reasons behind this. One is that inflation concerns have not dissipated, and the Middle East oil-price risk happens to exacerbate that concern. The other is term premium — that is, investors holding long-term bonds demand extra return to compensate for future uncertainty. That number is currently about 1.02 percentage points. The bond market's 'panic index' MOVE is around 107; the higher the number, the more severe bond price volatility. The market-implied federal funds rate path is about 3.925%, indicating that people still expect rate cuts, it's just that long-term borrowing costs are not coming down.

There are several consequences of high long-term rates. Mortgages and corporate financing become more expensive, and equity valuations are also pressured. Bond prices move inversely to yields: the higher the yield, the lower the paper value of existing bonds.

The UK is another link in this chain. UK corporate executives are urging finance official Xili to cut energy bills, and reports say the fiscal wiggle room for the next UK budget is evaporating — in other words, the government has less and less to spend. Also, the plan for the UK to raise more funds from retail investors has reportedly received a tepid response. As fiscal space shrinks, the government will rely more on bond issuance; when supply of gilts increases, yields can rise, which affects sentiment in global long bonds. This is the system's simulation of the UK gilt cycle, currently manifesting mainly as pressure on sentiment.

On China, a quick scan. The National Development and Reform Commission used the pen name 'Jinxuan' to publish ten consecutive articles in the People's Daily to cheer on the economy in the opening year of the '15th Five-Year Plan', covering Beidou, biomanufacturing, the private sector, the domestic big market, and other areas. But the market did not visibly respond on Friday: FXI fell 2.15%, KWEB fell 1.93%, MCHI fell 1.67%. MCHI is down 2.62% over the past 5 trading days and down 5.76% over the past month. There remains a gap between official confidence messaging and market sentiment for now.

Next, look at ETFs. These are the system's medium-term positions; some are connected to today's news, others are independent judgments. I'll go through them one by one.

First BNO, the Brent crude fund. It actually rose 5.78% over the past 5 trading days and 12.88% over the past month. Looking ahead, the ETF Radar model is biased positive for the next 1 to 3 months, with fairly consistent signals. The primary reason for this view is supply contraction from the Russia-Ukraine war; the new Strait of Hormuz news is another route of risk in the same direction and can be treated as corroborating evidence but not its direct cause. Quantitatively there are several reads: CFTC crude net long positions are about 79,592 contracts — that is, the net long bets from large traders after subtracting short bets — but that is 22% less than last week, indicating some are reducing positions. BNO's short shares in the most recent period surged 78.1%; if shorts are forced to cover, price moves will be amplified. Options implied volatility over 5 days has fallen by 4.19 points, so market fear of a drop has not reached extreme levels. As for the curve structure, near-month contracts are more expensive than far-months; this background has persisted for some time so I won't expand on it here. A reminder: BNO has already risen a lot in one month, and part of that is already priced in.

Next AGG, the U.S. aggregate bond fund. It fell 0.91% over the past 5 trading days and 2.78% over the past month. As for the outlook, data point AGG negative, with multiple pieces of evidence aligned. This is a true transmission of today's main theme: higher long-term rates put pressure on bonds. Some reads are: 10-year yield 5.24%, term premium 1.02 percentage points, MOVE index 107.29. There is also contrary evidence: the nonfarm payrolls data were on the cool side, there has been net inflows over the past 30 days equal to 1.07% of AUM, and RSI14 is only 24.3, meaning it is quite oversold. Oversold means it fell too fast and can rebound at any time. So a short-term rebound and medium-term weakness can coexist.

BNDX is the international bond fund. It dipped 0.17% over the past 5 trading days and 1.14% over the past month. The model is biased negative for its outlook, with consistent signals. The basis is the same from rates and volatility: MOVE rose to 108.13, the U.S. 10-year yield 5.29%, term premium 1.02 percentage points. Two points to note. First, net inflows over the past 2 days equal 2.42% of assets, money is flowing in, which is opposite to the model's direction. Second, short shares increased by 68.1% from the last period, indicating a high degree of crowding. The predictive market assigns a probability of 0.14 to 'U.S. troops invading Iran', indicating the market does not treat the most extreme scenario as the baseline. BNDX hangs under the U.S.-Iran war framework, but the real drivers are rates and volatility, and the weekend tanker news is only indirectly related.

Finally UUP, the dollar index fund. It rose 0.94% over the past 5 trading days and 3.14% over the past month. Looking ahead, data point to UUP biased positive with consistent signals. The logic is straightforward: the U.S. 2-year yield is 4.78%, the 10-year is 5.24%; returns on dollar assets are relatively high, so the dollar is supported. This round UUP has outperformed the broad market by about 5.05%, with a maximum drawdown of only 0.24% during the period. Headwinds include Friday's cooler-than-expected employment data, which leaves room for rate cuts, and rate cuts are negative for the dollar. Also, since late September subscription funds have continued to flow in, showing signs of crowding. With both bullish and bearish factors, we can only say the direction is biased positive, not a one-sided market.

Incidentally, VOO's bullish confidence fell from 0.68 to 0.52. The main reasons for the signal being weakened are rising long-term yields and the risk of a hawkish Bank of England, which has squeezed upside space.

Overall, the weekend Middle East news added uncertainty to oil prices and inflation, Friday's nonfarm payrolls further muddled rate-cut expectations, and long-term rates have therefore remained elevated. ETF Radar's current stance is oil biased positive, bonds biased negative, and the dollar biased positive, but the signal strength on these tracks is not maxed out; crowding and rebound risks need to be monitored simultaneously.

A reminder: the above are directional forecasts for the general market from a systematic quantitative model and do not constitute personalized investment advice; please consult a licensed investment advisor before investing.