Treasury yields are above 5%. Here’s what it means for stocks
Treasury yields continued to rise sharply across the curve on Tuesday, sending the yield on the benchmark 10-year note above the closely watched 5% level.
The 10-year Treasury yield added 7 basis points to 5.029% by 5 a.m. ET, while yields elsewhere on the curve rose roughly 4 to 6 basis points. Yields on the 20-year and 30-year Treasurys were last seen at 5.434% and 5.391%, respectively.
U.S. Treasury yields
Global yields followed Treasury yields higher, with government borrowing costs rising in Japan, Germany, the U.K., France, and elsewhere.
Bond yields and prices move in opposite directions, with 1 basis point equating to 0.01 percentage point.
The relationship between stocks and bonds
While the moves in the bond market fueled questions about what’s in store for the Federal Reserve’s two-day September meeting – which begins Tuesday – they also raised concerns about the outlook for global equities.
Sovereign bond yields influence borrowing costs not just for the governments that issue them, but also for consumers and businesses. They also have the potential to limit equity valuation growth and weigh on corporate earnings – but their reaction, historically, has depended on what’s putting pressure on bonds.
Stocks slipped in European and Asian trade on Tuesday, while U.S. stock futures pointed to a negative open after a losing session the previous day.
“Equities typically appreciate alongside rising bond yields when the market is raising its expectations for economic growth but struggle when yields rise due to other drivers, like fiscal concerns,” Goldman Sachs Research Chief U.S. Equity Strategist David Kostin wrote in a report last year.
Much of this year’s equity rally – as well as recent volatility – has been driven by investor enthusiasm around AI development, which has been reliant on vast amounts of capital, as well as optimism around earnings momentum. In the bond market, assets have come under pressure from the economic fallout of the Iran war, growing anxiety about mounting government debts and other fiscal concerns.
In a note on Tuesday morning, Barclays strategists said higher rates had already pressured valuations and were increasingly putting equity portfolios at risk.
“While earnings have so far offset the drag, the approaching 5% threshold in 10Y yields marks a historically important inflection point, beyond which rates have typically become a more persistent headwind for equities,” they said. “With inflation risks lingering and yields moving higher, the cushion provided by earnings growth may become increasingly difficult to maintain.”
“Our base case remains constructive on equities, supported by continued earnings momentum, but the risk of a sharper repricing grows if yields move materially above current levels,” they added.
Fed in focus
However, some market watchers appear undeterred by rising rates.
In a note Tuesday, the BlackRock Investment Institute said that although higher global…
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