10-Year Treasury Yield Makes Market Nervous: Morning Brief

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Last year, as Treasury yields rose, stocks mostly shrugged off the move. What strategists have in mind is that returns are rising due to expected economic growth, so everything is volatile. With the expectation that interest rate cuts by the Federal Reserve were imminent, there was another reason to stay calm.

Investors are no longer in the cold 10 year return (^ TNX) feel anxious. It is rising about 4.8%, and will touch highs in late 2023.

One reason is that the rise this time was accompanied by data showing that inflation is accelerating again, particularly in this week’s report from the Institute for Supply Management, which said prices paid for services were on the rise.

Markets have already lowered their expectations for further Fed rate cuts this year. Now they may have to revise those forecasts further, especially given that incoming President Trump’s fiscal policies are widely viewed as potentially inflationary – a sentiment in the United States. Introduction to the minutes of the Federal Reserve’s December meeting.

“My main fear is that the inflation genie is never put back in the bottle after the Covid inflation spike,” says Joren Timmer, director of global macro at Fidelity Investments. He said in an interview with Yahoo Finance. “If the economy really accelerates without completely eliminating the inflation dragon, we could see inflation, which is currently at its highest levels, return to the highs and perhaps three-and-a-half or four. It’s not a prediction, but it’s a scenario that would, I think, prevent the Reserve Bank from Fed to lower interest rates further.

This is not a scenario the market is pricing in right now, Timmer said.

There is debate about what level the 10-year yield would be particularly problematic for stocks, with consensus around 5%. The markets have already had a taste of that: less closely watched 20-year Treasury bonds reached 5% this week.

Despite the returns, most Wall Street strategists (including Timmer) still expect stocks to rise this year.

Earnings — not fiscal policy, not the Fed, not Trump — will determine where stocks go this year, Michael Aron, chief investment strategist at State Street Global Advisors, told SPDR Business US.

“In my view, I think investors are wrongly obsessed with how many interest rate cuts the Fed will have this year,” Arone said. In an interview. “Earnings are growing, and I think that’s where the focus should be.”

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