The Wall Street stock market bull may face headwinds from higher bond yields – Bryan R. Smith/Agence France-Presse/Getty Images
Investors hoping for a Santa Rally have so far been disappointed. The opening bell on Monday shows Wall Street again struggling following a 1.1% dip for the S&P 500 SPX at the end of last week.
One cause for the caution is rising bond yields. The benchmark 10-year Treasury yield BX:TMUBMUSD10Y closed Friday at its highest level in seven months, having jumped nearly a full percentage point since September despite the Federal Reserve cutting its benchmark interest rate. Concerns that President-elect Donald Trump’s tariff and tax-cut policies may exacerbate inflation, while a burgeoning government deficit increases bond supply, have put downward pressure on bond prices.
This may continue to be a problem for equities in coming months, according to a team of Evercore ISI strategists led by Julian Emanuel. “Long term, earnings drive stocks; however, there are times when rising long term yields can exert medium-term pressure on equities even as the backdrop remains favorable,” says Emanuel in a note published Sunday.
Evercore ISI –
And he continues: “As 2025 begins, rising long end bond yields pose the biggest challenge to the bull market. Indeed, the latest surge in the 10-year yield helped spur a bout of equity market volatility after 12/18’s Federal Open Market Committee [meeting].”
There are many reasons why benchmark yields may pull back a bit in coming days after their strong surge higher, Emanuel reckons, including elevated Treasury short positions being exited, and the potential for an easing of geopolitical tensions in oil-sensitive areas, which would trim inflation concerns.
However, those aforementioned Trump policies, fiscal deficit factors, and possibly reduced buying of Treasuries by China and Japan, will pressure yields higher in the medium term, so that rising bond and equity market volatility are Emanuel’s base case for the start of the year.
And the important thing to remember is that “yield pressure is agnostic to stock prices, occurring when valuations are not extended (2018) and when they are (1994, 2022),” he says.
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Crucially, “there isn’t a uniform ‘threshold’ over the decades for 10-year yields” that have caused stocks to correct, according to Emanuel. Indeed, past ‘trigger levels’ have ranged from 3% in 2018 to 6% in 1994.
For this cycle he thinks a 10-year Treasury yield of 4.5%, which it was above early Monday, can be overcome by the stock market. However, should the benchmark yield breach 4.75% then Emanuel sees “a longer and deeper equity correction.”
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He observes that since the trough for yields in 2020, when the bond bull market ended, stocks have advanced a cumulative 117% over 1,754 days, but in that time, stocks are -2.1% over the 89 days the 10-year yield has been above 4.5%; and -3.7% over the 20 days it has been 4.75% or higher.
And 5% is a “level which, like 3% in 2018’s tariff, immigration and tax filled Trump dominated first term, second year poses a greater threat to the cyclical bull market.”
Still, we should note that Emanuel and colleagues forecast that after early choppiness in 2025, the S&P 500 index can reach 6,800 during next year, so they reckon it’s unlikely those upper yield bounds will be breached.
U.S. stock-indices SPX DJIA COMP are sharply lower at the opening bell despite benchmark Treasury yields BX:TMUBMUSD10Y falling. The dollar index DXY is higher, while oil prices CL.1 rise and gold GC00 is trading around $2,612 an ounce.
Key asset performance
Last
5d
1m
YTD
1y
S&P 500
5970.84
0.67%
-1.02%
25.18%
25.18%
Nasdaq Composite
19,722.03
0.76%
2.62%
31.38%
31.38%
10-year Treasury
4.603
1.00
40.50
72.21
72.21
Gold
2626.1
-0.13%
-1.34%
26.75%
26.75%
Oil
70.4
1.22%
3.27%
-1.30%
-1.30%
Data: MarketWatch. Treasury yields change expressed in basis points
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U.S. economic data due on Monday include the Chicago Business Barometer for December, released at 9:45 a.m. Eastern, followed at 10:00 a.m. by November pending home sales.
The U.S. will hold a day of mourning on Jan. 9 for Jimmy Carter, the 39th President, who died on Sunday aged 100.
South Korea suffered its worst air disaster when 179 people died after a Jeju Air plane crashed. As the country’s politics remain unstable, and following weak industrial data, the KOSPI Composite index KR:180721 retreated 0.2% while shares of Jeju Air KR:089590 lost 9%.
The prospect of a Bank of Japan interest rate hike in the first quarter of next year and a drift lower in Treasury yields in the first half of 2025, suggest the USD/JPY fair value is peaking around now and will be in the mid-130s by the end of next year — implying the yen should strengthen, according to Kit Juckes, macro strategist at Société Générale.
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“USD/JPY itself has renewed its difference from rate differentials as carry positions which were unwound in July, were rapidly reinstated after the summer. We don’t expect to see a test, let alone a break of the July USD/JPY peak above 160,” Juckes adds.
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
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