How the 10Y Yield Interacts With Stocks
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Stocks experienced another volatile week as long-term interest rates broke to new highs. The US 10-year rate touched 5%, a level not seen since October 2023.
Rates are rising on speculation of a Fed hike next week, with market-implied odds at 86%. However, a hike appears unnecessary given contained inflation readings. During the last FOMC meeting, Warsh noted that rising long-term yields were already tightening financial conditions for the Fed.
Stocks typically face pressure when the 10-year rate exceeds 4.7% (the exact threshold has drifted higher alongside changing bond supply and demand). Below, we analyze previous instances where yields breached critical levels:
August 2023: rates broke above the threshold, triggering a decline in SPX. Once rates peaked and eased, stocks rebounded.
April 2024: rates rise above the threshold, SPX drops. Rates ease, SPX rebounds.
3. December 2024: rates rise above threshold, stocks drop. Rates ease, stocks rebound.
Over the years, the critical threshold migrated higher to 4.5%-4.7%, reflecting stronger economic growth. But the underlying pattern is unmistakable: rate spikes trigger proportional selloffs in stocks, while easing yields alleviate the selling pressure.
The pattern repeated over recent weeks as yields crossed 4.7% (the new threshold), pulling stocks lower. The good news is that rates appear to be forming a local top at 5%, which suggests a rebound in stocks is coming.
Rate drivers matter: inflation-driven yield spikes often lead to prolonged bear markets (like in 2022). Today’s yields are driven by economic growth with tame inflation, making a broader bear market unlikely.