By Martin Baccardax

The bond market is tough to understand at the best of times.

It isn't particularly intuitive, in that prices and yields move in opposite directions. It isn't especially transparent: Minute-by-minute trading isn't easy for the average investor to track. And it isn't entirely accessible as it is largely dominated by the world's biggest investors.

But its movements are hugely important, to both the global economy and the other financial markets that are tied to it. The signals it sends simply cannot be ignored.

And right now, it is telling us something we might not want to hear.

Benchmark 10-year Treasury note yields, perhaps the single most important indicator for a financial asset in the world, slipped below the 4% threshold for the first time since November this week. The yield was at 3.974% late Friday morning.

That extends a rally in bonds that has clipped more than 30 basis points, or hundredths of a percentage point, from the yield on the benchmark paper over the past month.

That would be a huge move at the best of times, but it is particularly striking now. The decline comes amid a slew of developments that would normally send yields in the opposite direction: hot inflation readings, resilient jobs reports, solid economic forecasts, and the nomination of a Federal Reserve chair who is expected to push for lower interest rates.

Inflation is the enemy of bonds, as it erodes the present value of future coupon and maturity payments. Faster than expected readings for both factory gate inflation, published Friday, and personal-consumption expenditures inflation, released last week, should have prompted a bond market selloff that took yields higher.

The rally that has taken 10-year yields below 4% is likely signaling a different concern. Or a bunch of them. None of which will be good for stocks.

"Markets aren't paying attention to PPI because, if it was, the 10-year Treasury wouldn't be below 4%," said Jamie Cox, managing partner at Harris Financial Group. "My sense is that markets are discounting an attack on Iran, and that trumps all at the moment."

The threat of a U.S. strike on Iran is certainly intensifying. Talks in Geneva have failed to bridge the gap between Iran's desire for a civilian nuclear program and Washington's reluctance to allow that.

The British government has removed its staff from the region, citing "ongoing security situation." The price of West Texas Intermediate crude oil is at the highest levels since August.

Closer to home, the myriad concerns tied to the advance of artificial intelligence technologies, from its impact on software stocks to the jobs cuts it likely will generate over the coming year, are also pushing investors toward less risky assets.

"There is a flight to quality underway as nervous investors flee stocks due to 'AI derangement syndrome' on the fears that unemployment will continue to soar as the new technology replaces workers," said Louis Navellier of Navellier Calculated Investing.

"Although Nvidia's Jensen Huang said that Wall Street was mistaken that AI was bad for software stocks, the fear continues to perpetuate," he added.

A sprinkle of tariff uncertainty, especially following last week's Supreme Court ruling that many of President Donald Trump's levies are illegal, is also driving money into fixed-income funds. According to Bank of America data, the flow this week alone was $16.8 billion, nearly triple the cash that found its way into gold portfolios.

Yields of less than 4% on 10-year notes should also boost stock valuations, which are effectively a calculation of the current worth of future cash flows, plus a risk premium. The former grows larger as the discount rate, closely tied to the 10-year yield, declines.

Instead, of course, we are seeing stocks set to end February notably lower. The S&P 500 is on track for a 1.4% slump that would leave it in the red for the year.

That certainly suggests that stocks will struggle to rally if the 10-year holds below this 4% threshold. That could trigger a feedback loop in which investors assume lower yields signal concern about economic growth, stoking more "risk off" capital flows that take benchmark yields even lower.

U.S. markets may also extend their relative underperformance against their international peers. Heading into the final month of the first quarter, domestic indexes are suffering their biggest gap since 1995 when compared with world benchmarks.

UBS analyst Andrew Garthwaite, who heads the bank's global equity strategy team, thinks this is likely to continue. He downgraded his outlook on U.S. stocks to "benchmark" in a note published Friday, citing a weaker dollar, policy uncertainty, and expensive valuations.

Wall Street is still holding to price targets that see the S&P 500 finishing the year at around 7750 points. The rationale is that a combination of corporate earnings growth, fiscal stimulus, and lower Fed rates will extend the market's long run of gains.

The bond market, however, doesn't look like it wants to go along for the ride.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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February 27, 2026 12:30 ET (17:30 GMT)

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