In the past, a sell-off in bonds was usually interpreted as a positive indication for equities.
It indicated that merchants were placing bets on a more robust economy. Not this time, though.
Investors were caught off guard by a selloff in global government bonds, even though none of the problems they seemed to be objecting to are new.
Moody’s decision earlier this month to deprive the U.S. of its top-tier credit rating seemed to initiate the selloff, even though nations like the U.S. and Japan have had significant debt loads for decades.
See: Growing U.S. bond yields frighten investors. Japan should be their first concern.
However, a seasoned currency strategist and economist recently identified a concerning pattern that served to highlight the precise reason why so many investors are so concerned about this selloff.
The link between the yield on the 10-year Treasury note and economists’ projections for economic growth over the next two years has recently broken down, as noted by Jens Nordvig of Exante Data.
“This is the main idea. Real yields in the US are rising. However, that isn’t the crucial aspect. What matters is that they are rising at a time when growth projections are falling. In a LinkedIn post, Nordvig presented the graphic and stated, “This is new, and much more concerning than the past yield spikes linked to strong growth and perceived hawkish delta in Fed 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.
The passing of the Republican budget measure in the House of Representatives overnight coincided with the most recent increase in Treasury yields; but, when investors purchased the stock and bond market decline, yields moved lower in Thursday afternoon trading. Bond yields fluctuate in opposition to price changes.
At 4.550%, the yield on the 10-year note BX:TMUBMUSD10Y decreased by 3 basis points.
The 30-year bond’s yield, BX:TMUBMUSD30Y, has, nevertheless, been above 5% and is close to its highest level since November 2023.
On the surface, that might not seem like much. However, Nordvig noted that the selling pressure on bonds might continue as the Federal Reserve remains neutral and growth forecasts are waning.
It will be difficult to meet the concerns of the so-called bond vigilantes if their goal is to control U.S. deficit spending. In a recent research shared with MarketWatch, Deutsche Bank strategist George Saravelos noted that altering U.S. fiscal policy is a difficult process. Governments in Europe find it far simpler to enact adjustments to their expenditure plans.
“The U.S. has an additional problem: whatever the Republican Congress decides to do with fiscal policy over the next few weeks, it will most likely be ‘locked in’ for the remainder of the decade,” Saravelos wrote at that time.
“There is really only room for one significant fiscal event under the current Trump administration due to the extremely challenging reconciliation process and the possible loss of a Republican majority in the midterm elections. There won’t be much that can be done to alter the fiscal trajectory for the foreseeable future after this is over.
According to Intelligent Wealth Solutions senior portfolio manager Randy Flowers, bond yields may limit stock prices for the foreseeable future. He believes the U.S. market will stay rangebound in 2025 for this reason.
“I believe that, for the time being at least, bond investors are once again in charge of the market. “It’s typically bad news for all parties involved, including equity markets,” Flowers stated. “We’ll see if it continues.”
