Bond Yields Surge, Threatening to Dampen Stock Market Rally

Stocks Reach New Highs, But Treasury Market Looms as a Potential Spoiler

Stocks surged to new highs last week, fully erasing losses caused by the U.S.-Iran war, but the bond market could spoil the party. The S&P 500, a benchmark for U.S. market performance, finished Friday's sessions at a record level and was up about 5% from its pre-conflict level through Friday.

In contrast, the Treasury market, evidenced by the Bloomberg Treasury Index, was down 1.7% compared with pre-conflict levels. The Treasury market is at a critical juncture and deepening losses at this point could pull money away from stocks as prices fall and yields rise.

Treasury Market Trends

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The popular iShares 20+ Year Treasury Bond ETF is approaching a critical support level. At the current price of $84.80, the long-term Treasury fund is nearing its lowest point over the past year, $83.30. A break below this level would bring the next intraday low of $83.24, set on Oct. 30, 2023, into the picture.

Treasury yields are also trending toward key levels of overhead resistance. The 10-year bond yield is currently at 4.444%, with the market on watch for a move toward 4.5%. The last time the 10-year bond yielded above 4.5% was on June 11. Debt that matures in 30 years now yields 5.006%, a level last seen on April 30 and in July of last year.

Comparison of Treasury Yields

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Market Sentiment

Treasuries are trending toward offering an attractive coupon payment, potentially making them more attractive than stocks. At the same time, lower prices create an attractive entry point for investors to rotate money into Treasuries from stocks, which have long been considered expensive.

Investors, as of Thursday, were paying 21.04 times the projected next 12 months profit of U.S. companies compared with the 10-year and 20-year average multiple of 19.3 times and 16.6 times, respectively. The market has gotten expensive since the pandemic as stocks of tech giants have come to dominate the index.

The Magnificent Seven group of large technology stocks—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—make up 36.5% of the index. However, the ability of risk assets to retain current lofty valuations with persistently elevated Treasury yields remains a wildcard.

Earnings growth is on track to accelerate to 24.6% in the first quarter, the highest in at least 4 years, according to Deutsche Bank estimates. Fourth-quarter earnings growth was 13.4%.