There’s room for stock markets to fall further as bond yields approach levels that have been painful for equities in recent years.
The US 10-year Treasury yield climbed to levels just shy of 4.7%, the highest since April after an almost uninterrupted surge of more than one percentage point since mid-September.
The move echoes the ones seen in 2022 and 2023, which were accompanied by sharp drops in global equities. Yet this time, the stock rally has only taken a gentle breather, leaving scope for downside should yields keep surging.
“Equity/bond yield correlations have turned negative again,” Goldman Sachs Group Inc. strategists including Christian Mueller-Glissmann wrote in a note, stressing that if yields keep going up without good economic data, it will hit equity markets. “With equities having been relatively resilient during the bond selloff, we think near-term correction risk is somewhat elevated in case of negative growth news.”
The strategists point out that longer-maturity rates have increased the most as yield curves steepen, indicating concerns on US fiscal and inflation risk. The bulk of the move has been in real yields rather than breakeven inflation.
There could be further swings ahead in expectations for monetary policy. Markets have already repriced the number of rate cuts in the US, with just one 25 basis point move seen by July. The FOMC meeting minutes due later Wednesday might offer clues about the policy outlook.
As of now, markets seem confident that the Goldilocks scenario of falling prices, a resilient economy and gradual policy easing will prevail. Most investors have entered 2025 as very bullish, especially when it comes to US equities, while brushing off inflation pressures that could come from potential tariffs and US policies under the new administration.
“Its all in the real yield and not inflation,” said UBS Group AG strategist Gerry Fowler. “It’s also all in the long end and not the short end, which suggests the market is really really bullish on productivity improvements in the US at this point, and has almost zero concern for tariff escalation.”
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