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Or sign-in if you have an account.Martin Pelletier's white Aston Martin Vantage (Mansory) is lined up waiting to take kids and their families for a lap at the Rocky Mountain Motorsports track in Calgary during a fundraiser for the Starlight Foundation on June 20. Photo by Handout/Martin PelletierThis past weekend I went to the racetrack for Father’s Day. It was a double win, as I was able to enjoy taking my car on the track with one of my sons while raising money for the Starlight Foundation, which works to brighten the lives of seriously ill children, and sharing the experience with sick kids and their families. Like skiing or downhill mountain biking, other adrenaline sports that I love, you have to look where you’re going, not straight in front of you, otherwise you risk losing control.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorAs a portfolio manager and professional investor, it’s no different. I not only look for turns ahead in the equity market, but I also watch closely for signals in other areas, particularly the bond market, which often acts as the fuel for stocks through interest rates and liquidity.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againRight now, when I look ahead, I don’t like what I see and so I’m taking my foot off the gas, tapping the brakes instead of accelerating into what could be a sharp turn.In response to rising oil prices and the closure of the Strait of Hormuz, the U.S. two-year Treasury yield has risen more than 20 per cent, from 3.2 per cent to 4.2 per cent from its March lows, while the U.S. dollar index has surged more than six per cent from its February lows, both significant moves in bond and currency markets. Longer-term yields also moved higher until mid-May, but in recent weeks the 10-year Treasury yield has fallen more than six per cent even as the U.S. dollar continued to strengthen, gaining 3.5 per cent over the same period.That divergence is the real story here.In my view, this reflects a classic late-cycle tug of war across the yield curve. The front end remains anchored by policy expectations. According to Bloomberg data, markets are pricing in roughly 1 1/2 interest rate hikes by the U.S. Federal Reserve over the remainder of the year. That has kept the two-year yield elevated and supported a stronger U.S. dollar through favourable rate differentials.Further out the curve, the message begins to shift gears. Longer-term yields have become less focused on the next Fed move and more concerned about the risk of policy error. While easing geopolitical tensions and the reopening of the Strait of Hormuz have contributed to the recent pullback, the broader signal matters more: Restrictive policy, if sustained, eventually slows growth.That expectation is beginning to show up in the long end, with 10- and 20-year yields appearing to have peaked. This part of the curve is transitioning from reacting to what the Fed will do next to pricing the potential economic damage if policy remains tight. The result is a flattening yield curve alongside a strong dollar and if this combination persists, it will tighten financial conditions even without another policy move.The issue is that a strong two-year yield and rising U.S. dollar can easily become a global wrecking ball, particularly in emerging markets where debt is often U.S.-denominated. Elevated short-term rates increase refinancing risk and weigh on rate-sensitive sectors.As I recently wrote in my piece The bond market warning signal many investors are missing, this is something I’m watching very closely as a signal for broader risk assets, especially equities. The resilience of the S&P 500 and Nasdaq becomes much harder to sustain if financial conditions continue tightening beneath the surface. While investors may welcome the pullback in gold prices and a stronger U.S. dollar, they should be careful what they wish for. As credit spreads widen, liquidity becomes more selective and funding tightens, and by the time it’s obvious, the repricing is already underway.There is another layer worth noting. The U.S. Treasury’s increasing reliance on T-bill issuance has reinforced the front end of the curve. Greater bill supply absorbs liquidity and keeps short-term yields elevated while competing with private funding markets for capital. This dynamic could flatten the yield curve more than expected and accelerate the withdrawal of liquidity from the system.What does that mean in practice? As liquidity is drained and short-term rates remain high, financial conditions tighten beneath the surface. Investors may begin to see higher volatility across risk assets, wider credit spreads and more selective access to capital. In that environment, portfolios often shift away from higher-beta equities and toward more defensive positioning, including assets that are less dependent on easy financing conditions.Put it all together and the picture becomes somewhat concerning. At a minimum, equity investors would be well served to pay closer attention to the bond market if they want to anticipate where risk may surface next.Because, as on the track, it’s not what’s right in front of you that causes the problem, it’s the turn you didn’t see coming.Martin Pelletier, CFA, is the author of Investing Through the Storm and a senior portfolio manager at TriVest Wealth, a team that is part of Wellington-Altus Private Counsel Inc. TriVest provides discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus._____________________________________________________________If you like this story, sign up for the FP Investor Newsletter. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.