On Friday, President Donald Trump rattled his tariff saber and stock market investors by threatening taxes on Apple Inc. and the European Union, capping off a gloomy week. However, the focus of all the recent trade controversy has been on changes in the bond market.
In particular, the yield on the 30-year Treasury bond BX:TMUBMUSD30Y saw a significant increase this week, hitting 5.15% on Thursday, barely short of its intraday peak of 5.17% in October 2023, before reversing course. According to Dow Jones Market Data, it closed Friday at 5.036%, up 14.1 basis points for the week and roughly 30 basis points for the previous four weeks. Bond prices and yields move in opposition to one another.
After breaking a six-day winning streak on Tuesday, the S&P 500 SPX fell for the next four sessions, recording a 2.6% weekly decrease that was the biggest since the week ended April 4. Over the course of the week, the Dow Jones Industrial Average (DJIA) fell 2.5 percent.
Concerned investors worry that yields are increasing to a point where stocks and other assets may see more suffering.
Trump’s tax and spending plan, which he has referred to as the “big, beautiful bill,” barely passed this week with a single vote, was the cause of the increase. After decades of fiscal neglect, Moody’s last Friday stripped the United States of its last triple-A credit rating, citing expectations that U.S. deficits and interest payments on existing debt will continue to rise in the coming years. The bill’s passage is seen as adding to an already agitated deficit.
Concerns about demand in the face of growing supply were heightened by Wednesday’s poorly welcomed 20-year U.S. Treasury bond auction. Major indexes fell precipitously as a result of the increase in Treasury yields.
“The impact of Trump’s ‘big, beautiful’ tax package on the total U.S. deficit worries bond investors. Giuseppe Sette, president and co-founder of the AI market research company Reflexivity, wrote in an email, “You should too.”
He admitted that for years, investors had mostly ignored growing deficits and other fiscal issues, but he cautioned about a possible turning point that might rekindle the so-called bond-market vigilantes who occasionally used their de facto veto power over irresponsible governments.
“Markets are a question of choice; they are cross-asset and cross-sectional by nature. Two things may occur when the longer bonds begin to resemble a 5% yield with slight inflation: terrified investors may reevaluate their equity position to convert to cash, while greedy investors may reevaluate their stock position to obtain additional fixed income carry, according to Sette.
“In any case, equity positions are distinctive in the current climate. The majority of other risky markets, including commodities, cryptocurrency, and high-yield currencies, also decline in value when equities does.
Additionally, yields on the 10-year Treasury note BX:TMUBMUSD10Y increased, rising above 4.60%, the highest level since mid-February, before reversing course to close the week at 4.508%. Over the past four weeks, the yield has increased by more than 24 basis points, and it increased by 7.1 basis points for the week.
In a note released on Friday, Larry Adam, chief investment officer at Raymond James, noted that a 10-year yield above 4.5% has historically been problematic for investor sentiment. He also noted that the level also corresponds with a 30-year mortgage rate of 7%, which may further strain housing demand and activity in the overall economy.
Furthermore, the price-to-earnings ratio of the S&P 500 struggles to increase or even contracts when the 10-year yield rises beyond 4.5%, demonstrating how stock market valuations typically move in opposition to interest rates.
“A move toward 4.75% would be even more concerning, as equities have typically underperformed at that level,” he stated. “Taken together – with rising yields and the likelihood of further downward in consensus EPS estimates – we believe our more cautious stance on equities is justified.”
Concern was also raised by the increase in real, or inflation-adjusted, long-term yields, which coincided with experts lowering their projections for economic growth. According to a LinkedIn post earlier this week by economist Jens Nordvig, founder of Exante Data, “this is new, and much more concerning than in past yield spikes linked to strong growth” and expectations that the Fed would be inclined toward tightening monetary policy.
That would suggest that bond investors are becoming more uneasy about the U.S. fiscal predicament and the absence of political will in Washington to lower the debt.
Long-term yield increases were not limited to the United States. Japanese long-term yields also rose sharply. The action demonstrates that the bond-vigilante phenomena is not limited to the United States.
Read: Bond ‘vigilantes’ are warning people all around the world. For your portfolio, what does that mean?
In a Tuesday note that encapsulated the sentiment, managing partner Stephen Innes of SPI Asset Management said, “The illusion of harmony between stocks and rates is beginning to fracture, duration risk is going global, and fiscal complacency is being repriced in real time.”
Both Japanese and U.S. yields had departed from their previous highs by the conclusion of the week. The increase was significant for some investors, but not enough to raise red flags.
Mark Arbeter, a seasoned technical analyst with Arbeter Investments, thought it was odd that the 30-year bond was receiving so much attention from the financial press and investors given the yield on the 10-year Treasury note is considerably more regularly monitored and indicative of economic activity.
In a phone conversation, he stated, “Maybe because it got above 5% before the 10-year did, that would be my guess,”
The 30-year move, according to Arbeter, does not yet meet the criteria for a technical breakthrough. That would require a return above the high of 5.15% until late 2023. The yield may reach the 6% to 6.4% level if a prolonged breakout occurs.
The 10-year yield would likewise climb significantly as a result. However, Arbeter stated that the speed of the move will be more important for stocks than the level.
“If it’s a slow, steady grind higher, that’s OK, the stock market can digest that type of move in yields,” he stated. “If we wake up tomorrow and yields are up 20 or 30 basis points and the velocity of yields increases, then the market’s going to have a problem.”
