Will Treasury yields resume their climb?- MarketWatch photo illustration/iStockphoto
Stock market bulls rallied last week, but concerns about a particularly strong rise in long-term Treasury yields likely haven’t dissipated, especially given the uncertainty over what Donald Trump might deliver when he returns to the White House Monday.
It’s not just the yield that matters they usually don’t As the Federal Reserve cuts its policy rate, but rising yields come as stocks are high, the S&P 500’s 12-month forward price-to-earnings ratio was 21.6 as of Friday, a five-year high, according to FactSet the average is 19.7, and the 10-year average is 18.2.
Rising yields could make already expensive stocks look less favorable than bonds with more attractive yields, analysts at TS Lombard said in a note on Friday. “Rising rates will make it harder for already high valuations to go higher.”
Stocks found their footing as the S&P 500 index SPX and the Dow Jones Industrial Average DJIA posted their biggest weekly gains since the week ending Nov. 8, the week of the presidential election, after the S&P The 500 briefly erased the 6.6% gain it saw between Trump’s Nov. 5 presidential election victory and its Dec. 6 intraday high. the record.
Now, a lot depends on whether last week was a yield peak or just after being technically overextended, said Jeff deGraff, president and head of technical research at Renaissance Macro Research.
“The real question for the rest of the quarter, and perhaps most of 2025, is whether the recent overbought proves an interim peak in yields that temporarily eases stocks, or whether it’s more durable and long-lasting as yields fall back to 4.0.” %? he said in the post.
DeGraaf said the drop in yields put RenMac’s stock market sensitivity to returns between the 70th and 80th percentiles, a band consistent with the S&P 500’s average return over the next 65 trading days, or roughly 13 calendar weeks (see chart below ).
– Renaissance macro research
Investors have spent a lot of time worrying about what level the 10-year yield might start to see a sharp cut in demand for stocks. It’s not just the absolute level of the yield, but how quickly it moves, that analysts said. can shake up the markets.
According to analysts at Goldman Sachs, history shows stocks can usually handle a gradual rise in yields, but the S&P 500 tends to struggle if the 10-year yield moves more than two standard deviations, which is currently around 60 basis points. point, or 0.6 percentage points a month, they found (see chart below).
– Goldman Sachs Research
By Jan. 14, when the yield was at its most recent peak, the 10-year yield had risen about 40 basis points over the previous 30 days and about 50 basis points from early December lows, Goldman analysts said.
So what’s driving the yield move?Relief came last week from the December CPI reading, as well as comments from Federal Reserve Governor Christopher Waller, who said policymakers could still cut several rates in 2025, defying market expectations. :
But yields have risen sharply despite Fed tapering in 2024. Concerns about the growing U.S. fiscal deficit and fears that Trump will do little to curb it and may widen it despite promises to cut spending have been cited as a potential driver. , as well as the potential for aggressive import tariffs to boost inflation.
The rise in yields could reflect ideas the Fed made a mistake by cutting interest rates by 100 basis points in 2024. It could also reflect a strong economy, which could ultimately bode well for stocks, though intermediate shocks associated with rising bond yields.
Investors, meanwhile, are bracing for volatility in financial markets after Trump takes the oath of office on Monday, according to news reports that Trump is set to issue 100 executive orders.
Investors and traders are likely to spend a shortened holiday week, with U.S. markets closed Monday for the Martin Luther King Jr. holiday, awaiting details on Trump’s approach to overhauling global trade and immigration policy, said Jan Lingen and Weil Hartman of BMO Capital Markets. of strategists in the post.
As for Treasury yields, this week’s pullback may offer some breathing room.
“For now, the Treasury market remains firmly in consolidation mode, and we struggle to envision a breakout in either direction,” they wrote. rates are in a good position to respond to Trump’s headlines without causing any technical damage.”
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