VaR Shocked: How Much HIgher Can Yields Rise Before Crashing Stocks

Markets continued bleeding lower on Friday with geopolitics remaining at the forefront: the immediate trigger for the risk off mood were rehashed reports (this time from Axios) that the US is considering a high-risk move to take over Iran’s Kharg Island (which was reported before) as well as the US making preparations (this time from CBS) for potential ground troops in Iran (which was also reported before). But as the market now has a 15 millisecond memory as HFTs have taken over, even an hour-old headline sparks renewed selling (or in more rare cases, buying) panic. 

But while stocks did slide, the big story of the week was the sharp spike on global yields, with US 10Y Treasuries (+13bps to 4.38%) having their second biggest 1 day move higher since Liberation Day...

.... while 10 year UK gilts hit their highest level since 2008 (+3% to 4.99%), surpassing even the Lettuce moment of 2022.

The panicked surge was driven by:

1. Inflation risk over the war duration, and the soaring price of oil
2. Hawkish Central Banks (Fed & BOE earlier in the week)
3. Positioning pain in the front end of the rates curve, where the unwind of the much beloved steepener trade is absolutely crushing hundreds of funds. 

The problem is that with bond yields now seemingly unanchored and swinging wildly at an ever faster pace in line with raging daily newsflow, it won't take much before the dreaded VaR shock kicks in and trading desks are forced to unwind risk across the entire spectrum resulting in a liquidation cascade across all asset classes.

Are we there yet?

For the answer we go to Goldman's Jon Hurvitz who writes that "global rates and inflation fears continue to drive price action in equities" but what matters most is the rate of change in bond yields; Here, Hurvitz refreshes a rule of thumb about the velocity of rate move and its impact on equities, which is as follows:.

• 2 std move higher in real yields or 2 std lower in nominal yields = bad for stocks, and the average 1-month S&P move -4% in either situation.
• 2 std real yield move higher = +40bps or 2.2% absolute level…we have moved ~20bps higher over the past month. To Goldman, this is the more concerning move.
• 2 std nominal move lower = -50bps or 3.86%; we have moved ~30bps higher over the past month.

So to answer the $64 trillion question: we are not there yet for the full-blown 2 sigma VaR shock, but another 20bps more higher in 10Y yields - which at this rate would be hit by Wednesday - and all bets are off.

As an aside, Fed futures are now pricing in half a HIKE in the US by October. So much for the Fed easing conditions... which explains the plunge in gold, if not the stubborn move higher in crypto which has been one of the most resilient assets in response to the surge in oil/inflation expectations. 

Finally, we may not even need a VaR shock for the move in stocks to accelerate to the downside: as Goldman notes, the S&P is now below its 200-dma (6,621); ETF activity remains elevated; Top of Book liquidity remains impaired (volumes ≠ liquidity).

A quick take from the Goldman Prime Brokerage does nothing to ease fears of an even bigger flush lower in risk:

• US Long/Short Gross leverage slumped for a 2nd straight week (gross plunged a whopping 7.2bps and is now just 50% 1Yr percentile, after being a record high just a few weeks ago)  as managers unwound risk amid continued market volatility.

• US equities were net sold for a 5th consecutive week, driven by short sales in both Single Stocks and Macro Products.

The breadth of single stock length reduction picked up as 10 of 11 sectors (ex Staples) were net sold, led again by cyclicals.

• Speaking of cyclicals, the implosion there is nothing short of spectacular: Non-consumer cyclical sectors (Energy/Materials/Industrials/Financials/Real Estate) collectively were net sold for a 9th straight week by hedge funds. The pace of selling has picked up notably since late February (i.e., into the war in Iran), having now reversed all of the cumulative net buying in the group since the start of 2025. Aggregate long/short ratio in the group now stands at 1.68 (vs. 1-year high of 1.89 seen in January), the lowest level since May ’25.

• Another notable sector is healthcare, which until recently provided a rare shelter from the storm. Well not any more, as HFs net sold Health Care stocks for the first time in 5 weeks, driven by short sales – on a GICS level 1 basis, it’s worth noting that Health Care is now the only net bought US sector YTD on the Prime book. 

In conclusion, the Goldman desk flows point to both Long Onlies and Hedge Funds finishing very aggressive (especially the latter) net sellers on the week (recall, we saw the a 5-sgima event earlier in the week, when Long-Only Funds sold the most stocks on record in the past week). 

To summarize: we closed the week at the lows, following a notable uptick in short supply into the weekend:, with a surge in the S&P Market on Close imbalance $9.6bn for SALE for Quadwitch on Friday, sending the S&P to the lowest since September 25, now below the 200-day moving average (down ~6% MTD) as selling gets worse. But should yields spike another 20bps, that's when the real pain hits. 

More in the full Goldman Weekly Rundown note and Weekly Recap note, both available to pro subs.