The 10-year Treasury yield has reached a level that’s making investors nervous, climbing to 4.8% on Monday and approaching 5%. This rise is not just about the number itself, but also about the uncertainty it creates in the market.
According to DataTrek Research co-founder Nicholas Colas, the 10-year Treasury yield has averaged 2.91% over the past two decades, making this current level unusual. The increase introduces new questions and challenges, especially since a decade of low rates has enticed investors to seek gains in stocks.
Jurrien Timmer, director of global macro at Fidelity Investments, notes that when yields were 1%, they didn’t compete with equities because there was no alternative. Now, with the equity market having a similar earnings yield, stocks must compete with what’s considered a risk-free asset.
Higher rates can also be challenging for stocks due to high borrowing costs, which could eventually weigh on economic activity or hurt company profits if they need to refinance at a higher interest rate. Strategists believe this level of rates challenges the S&P 500’s current high valuation, which sits at a 21.5 forward 12-month price-to-earnings ratio.
The rise in the 10-year yield is seen as a depiction of the rising uncertainties in markets. Concerns about sticky inflation and the possibility of no interest rate cuts this year have driven the spike. The yield has also risen on days when President-elect Donald Trump discusses a wide-sweeping tariff policy.
Investors are unsure what’s driving the rise in yields or when it will stop. CFRA head of research Sam Stovall notes that there’s an awful lot of uncertainty, and investors aren’t sure which way things are going to turn.
RBC Capital Markets head of US equity strategy Lori Calvasina believes that if the market breaks out to this new high, it could signal a structurally rising rate environment. This would be a completely different environment than most people remember.
Source: https://finance.yahoo.com/news/why-rising-bond-yields-are-such-a-problem-for-stocks-morning-brief-110056996.html