The bond market is getting harder for stocks to ignore
The 10-year Treasury yield reached its highest level since April 2002 on Thursday before easing back toward 5.25%.
The 30-year Treasury also climbed to a 24-year high, touching roughly 5.61% before pulling back.
Those levels matter far beyond the bond market. The 10-year influences mortgage rates, corporate borrowing and the discount rates investors use when valuing stocks.
At the same time, government bonds now offer yields above 5%, giving investors a much more attractive alternative to equities than they had through most of the past decade.
Fundstrat strategist Hardika Singh has pointed to 5.5% on the 10-year as an important level where equity valuations have historically begun to compress.
The 10-year is getting close.
When investors can earn more than 5% in government debt, the price they are willing to pay for riskier assets starts to change.
This selloff is happening around the world
The rise in yields is not limited to the U.S.
Japan’s 10-year yield climbed above 3.1%, its highest level since the mid-1990s.
In Europe:
- Germany’s 10-year yield climbed above 3.6%, its highest since 2008
- France’s 10-year approached 4.93%
- Italy’s 10-year rose toward 4.71%
- The U.K.’s 10-year climbed toward 5.48%
The pressure reflects a combination of stubborn inflation, large fiscal deficits and rising government interest costs.
Major economies are dealing with persistently large deficits and rising debt-service expenses, forcing investors to demand higher returns to hold long-term government debt.
Japan adds another layer. Higher Japanese interest rates and a weaker yen are changing the economics of the carry trade that helped push cheap capital into global markets for years.
If governments need to borrow more at the same time global capital becomes more expensive, higher yields can become much harder to reverse.
Inflation is keeping pressure on the long end
Fresh economic data gave bond traders another reason to remain cautious.
U.S. manufacturing prices jumped sharply in September, with the prices index climbing 6.8 points to 77.9 and backlogs rising 4.6 points to 56.4.
Oil is adding to the pressure.
Bonds are increasingly moving in lockstep with oil prices, which have remained volatile as the conflict in the Middle East disrupts crude exports.
Brent moved back above $100 per barrel on Thursday.
Higher energy costs can feed directly into transportation, manufacturing and consumer prices, making it harder for central banks to bring inflation back toward target.
If oil falls sharply, long-term yields could get relief. If crude remains near triple digits, inflation expectations may keep bond buyers demanding higher returns.
Stocks may eventually have to adjust
The remarkable part of the current market is how well equities have held up.
AI spending, strong corporate earnings and resilient economic growth have helped keep stocks near record levels even as Treasury yields climbed to highs not seen in more than two decades.
But there is a limit to how long those markets can move in opposite directions.
At a 10-year yield above 5%, investors can earn substantial returns without taking equity risk. If the yield moves toward 5.5% or higher, high-growth and richly valued stocks may face increasing pressure.
Companies also feel the effect directly. Financing data centers, factories, acquisitions and other major projects becomes more expensive as the underlying risk-free rate rises.
Consumers see the same pressure through mortgages, auto loans and other borrowing costs.
The bond selloff is effectively raising the price of money across the entire economy.
The next important question is not simply whether the Fed hikes again.
It is whether long-term borrowing costs are entering a structurally higher range than markets have grown used to.
If the 10-year breaks through 5.5% and stays there, Wall Street may have to start repricing that possibility much more seriously.
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