A more than well-known artifact is drawing an ascending parabola in the sky that is scaring Wall Street investors. The yield on the 10-year Treasury bond, the benchmark for the US and really for global financial markets, is heading at full speed towards 5% in a climb that does not bring back the best memories to the operators. The last few times the performance of T-Note went up this way, the pain was unleashed in the bags. And the worst thing is that that wasn’t that long ago.
Right now, the 10-year performance is flirting with the 4.7% zonethe highest level since April after a nearly uninterrupted increase of more than one percentage point since mid-September. This movement resembles that seen in 2022 and 2023, which was accompanied by sharp declines in global stocks. In 2022, the S&P 500 erased a resounding 19.44%. The bond had gone from 2.5% to above 4% in the second half of the year. In the fall of 2023, global stock markets (the MSCI index) fell as the bond quickly traveled from 3.5% to 5%. However, they warn from Bloombergthis time, the stock rally has only taken a soft breather, leaving room for a decline if yields continue to rise.
In the latest American bond runs, growth stocks (growth), like the technologicalwere the most affected. “These companies discount significant future earnings growth in their valuations, the present value of which is reduced by increasing the discount rate used, a rate that is usually calculated using the so-called ‘risk-free interest rate’, which is normally the yield on the bond. of the US with a maturity of 10 years. If this rate rises, valuations will correct downwards,” explains Juan José Fernández-Figares, strategist at Link Securities. This discount rate can be defined as the calculation used to know how much money that will be received in the future is worth in the present.
“Correlations between stock and bond returns have turned negative again,” Goldman Sachs Group strategists including Christian Mueller-Glissmann write in a note. These analysts warn that if yields continue to rise without good economic data, this will affect stocks: “Given that stocks have been relatively resilient during the bond sell-off, we believe that the short-term correction risk is somewhat elevated in case of negative news about growth.
The cocktail that has brought the bond to the threshold of 5%, a level that it reached in October 2023, in the midst of the rebound in the term premium of bonds due to fiscal uncertainty, has to donald trump as a star ingredient. His victory in the November presidential election and his return to the White House bring with them a series of risks that have quickly inflated yields. Speculation that Trump’s policies will spur a acceleration of inflation (tariffs on US imports that will raise the price of products and a restriction on immigration that will affect the workforce) and larger deficits (the Republican candidate has championed more fiscal gifts with tax cuts) have fueled this inertia.
An avalanche of corporate bond issues and $119 billion in U.S. debt auctions this week (with more government borrowing expected in the coming weeks) have added to the upward pressure (on yields, it’s worth remembering that the price decline in bonds -more sales-, means an increase in the required profitability). The signs are clear. The monthly 10-year bond auction of the US Government has obtained the highest performance since 2007. The auction, worth 39 billion dollars, has been awarded at 4.68%.
“We need some certainty on fiscal policy and we will hear more about it when Trump is sworn in,” said Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock. “This uncertainty about greater Treasury bond issuance reaching the market will keep buyers away,” he warns.
“We will have to monitor the possible impact of Trump’s trade and immigration policies on inflation in the medium term. Some higher inflation expectations They could push bond yields even higher and weigh on the valuations that equity investors are willing to pay for companies’ future cash flows. Trade tensions could also cause volatility in the affected sectors and markets,” adds Tim Murray, strategist at T. Rowe Price.
The prospect of higher inflation again, at the same time that the American economy remains strong and the cooling of the labor market does not, for the moment, turn into a tragedy, gives rise to the reading that The Federal Reserve will be very restrained with rate cuts of interest. A factor that contributes to keeping bond yields high. In its latest quarterly projections, the Fed cut its prospects for cuts for 2025 from four to two.
In the absence of new clues from the central bank, with attention focused on the official employment report for december which is published this Friday, operators are now discounting less than two rate cuts for this year, placing the first in no less than July. An absolute contrast with the seven drops for this year that the market contemplated.
“Strong demand growth, the new U.S. administration’s pro-growth economic policies, and inflationary risks from policy proposals to limit immigration and raise trade tariffs make rate cuts by the Fed increasingly less likely,” certifies David Kohl, chief economist at Julius Baer.
I walk up to 6%?
So far, markets appear confident that the ideal scenario of falling prices, a resilient economy and gradual policy easing will prevail. Most investors have entered 2025 with a very optimistic attitude, especially when it comes to US stocks, and have downplayed inflationary pressures that could arise from possible US tariffs and policies under the new administration.
But fear is beginning to take hold. One proof is that Investors are positioning themselves for much higher returns. Tuesday’s options data from the Chicago Derivatives Exchange (CME) telegraphed 10-year Treasury yields of 5% by the end of February.
For some analysts, this is just the beginning: Padhraic Garvey, head of debt strategy at ING, sees 10-year US Treasury yields trading around 5.5% by the end of 2025, while Arif Husain, also an analyst at T. Rowe Pricedefends that 6% is within the range of possibilities. Others, like Steven Wieting of Citi, claim to be more realistic: 5% is possible, but “close” is more likely. His firm estimates that benchmark yields will end 2025 around 4.75%.
Not all strategists see it as bad news. “Of course, the rise in yields is a bit painful. But in a way, it could also be considered a gift: there is still a lot of cash sitting idle and now that cash can be put to work,” argues BlackRock’s Navin Saigal.
#American #bond #heading #hopelessly #scares #Wall #Street #risen #tragedy #stock #markets
