The benchmark 10-year Treasury yield stayed just over 4.3% for most of Tuesday’s session after the bond market sold off early in the day. This is a level that stocks have had a hard time adjusting to over the past year.
Adam Turnquist, chief technical analyst for San Diego, Calif.-based LPL Financial, says that any rate above 4.3% on the 10-year bond is “a line in the sand for stocks” and a level of resistance that goes back to October 2022. A rise above this level “seems to be pretty hard for the stock market to handle.”
Like, in early September 2023, the yield started to rise above 4.3%. This was caused by a stronger-than-expected number for the service sector in August. The rise set the tone for what would happen the next month. For the first time in 16 years, the rate quickly went above 5% on October 23. As of that same day, the S&P 500 had lost money for the longest time in 2023.
Then, in April 2024, the yield went up above 4.3% again, this time because of rising inflation fears caused by good data from the Institute for Supply Management about manufacturing. On April 25, it closed at 4.706%, its highest level since 2024. This was because annualised core PCE inflation for the first quarter was higher than predicted. Again, the S&P 500 fell, and by the end of that month, it had dropped the most since September 2023. On top of that, the Dow Jones Industrial Average had its worst month since September 2022.
The next figure shows that when the 10-year Treasury yield went up during both times, stocks went down at the same rate. The lightly shaded spots in the bottom half of the chart show where the S&P 500 has gone down.
On Tuesday, the 10-year yield TMUBMUSD10Y 4.257% hit an all-time high of almost 4.34%. This was due to a wave of selling in U.S. government debt that started in Europe during trading hours. Consumer sentiment in the U.S. rose to its highest level in nine months in October, which kept the selling going for part of the afternoon trading session in New York. But by the end of Tuesday’s trading, the yield was just a little lower at 4.272%, which is below the 4.3% mark. U.S. stocks ended the day with a mixed performance (DJIA-0.36% SPX 0.16% COMP 0.78%).
Now that the 10-year yield is well above its 200-day moving average of almost 4.18%, it seems likely that prices will go up even more. “The question is how much higher can we go?” We might be able to go back to the highs of 4.7% in April. That will be our last line of defence before we go for 5%, Turnquist said on the phone on Monday.
The problem with stocks after that is mostly due to how fast the 10-year yield is going up. It has less to do with its actual level. In fact, the rate stayed above 5% for many years before 2000. There are some who say that a return to April’s high of 4.7% would cause bigger problems for stocks, but the 10-year rate has already gone up 65 basis points since mid-September. This is partly because of worries about how inflation would rise if Republican Donald Trump wins the election on November 5 and takes over the whole government.
“Yields have changed very quickly,” Turnquist said. “The rate of change will be the most important thing for stocks.” He said that rising growth expectations for the U.S. are the most important reason why yields are going up, but the possibility of bigger U.S. deficits is also playing a part.
The analyst also said that long-term signs of a strong U.S. economy may help to lower some of the risk of stocks going down.
