Alarm bells ringing, everyone should reduce their positions together.

How does an AI · VaR shock trigger a chain of market liquidations?

Source: Wall Street Intelligence Circle

Everyone is waiting for the market open on Monday.

From the market itself, the biggest danger isn’t falling stocks, but bonds going “out of control”—a sudden surge in global government bond yields. That’s the real big risk this week.

For example: the US 10-year Treasury yield jumped 13 basis points in one day to 4.38%; the UK 10-year government bond yield approached 5%, hitting its highest level since 2008, even higher than during the “Truss lettuce crisis” that year.

Bond yields are the foundation of global asset pricing. People invest in AI, gold, US stocks, growth stocks—all based on a key premise: interest rates must stay stable. Once bond yields start rising sharply, rapidly, and unpredictably, the entire market will panic. Because this signals higher future financing costs, stock valuations will be compressed, and all high-leverage trades become risky—risk models will start warning, forcing institutions to cut positions.

So this time, the biggest danger isn’t just “stocks falling,” but bonds—usually the “stabilizer” of the market—starting to malfunction.

Why did yields suddenly spike so sharply?

· First, war pushed oil prices higher, which increased inflation fears (self-evident).

· Second, the Federal Reserve’s hawkish stance this week shattered the illusion of “central bank support,” leading to further bond sell-offs and pushing yields higher.

· Third, many funds previously engaged in a popular trade betting that short-term and long-term interest rates would move in a certain rhythm. Now, the market is completely off-script, causing these positions to start losing money. When losses occur, they are forced to liquidate. Once a wave of forced selling begins, it’s not just “I’m bearish so I sell,” but “I don’t want to sell, but I have to.” This passive liquidation is often more dangerous than active bearish bets.

The term the market fears most now is called VaR shock.

It can be simply understood as: risk systems collectively alarm, forcing everyone to reduce positions.

Many large institutions don’t trade based on intuition but rely on risk control models. When yields fluctuate too quickly and violently, these models automatically flag that the portfolio risk exceeds limits, requiring liquidation. Not only bonds, but also stocks, credit bonds, commodities, and even anything with decent liquidity. So, the real big crash isn’t caused by “fundamentals suddenly turning bad,” but by extreme price volatility triggering risk controls, forcing forced sales, which then cause even bigger swings, leading more people to sell—this is the so-called “chain liquidation.”

We’re not at the worst point yet, but it’s not far off. What can truly bring down the market isn’t just high interest rates, but the speed at which rates are rising. If the 10-year US Treasury yield jumps another 20 basis points, it could approach a “2-standard deviation shock,” potentially triggering more intense systemic declines.

If it’s just sentiment, the market can still endure; but if more risk controls, leverage liquidations, and passive fund selling occur, the rhythm will suddenly become very ugly.

So, what could really break the market is the chain of oil prices—inflation—interest rates—liquidation.