Stock Markets Face Downside Risk as US Treasury Yields Reach Levels That Could Hurt Equities
As US Treasury yields approach critical levels, concerns grow that the stock markets may be vulnerable to further declines. The US 10-year Treasury yield surged to nearly 4.7%, its highest level since April, following a steady rise of more than one percentage point since mid-September.
This increase in bond yields mirrors the patterns seen in 2022 and 2023, periods that were marked by significant drops in global equity markets. However, unlike those times, the stock market has only experienced a mild pause in its rally, leaving open the potential for a downside correction if yields continue to climb.
Goldman Sachs strategists, including Christian Mueller-Glissmann, warned that the correlation between equities and bond yields has once again turned negative. They pointed out that if bond yields continue rising without solid economic data to back them up, it could create downward pressure on stocks. “With equities having been relatively resilient during the bond selloff, we think near-term correction risk is somewhat elevated in case of negative growth news,” they wrote in a note to clients.
Rising Long-Term Yields Reflect Concerns Over Fiscal and Inflation Risks
The biggest increases in bond yields have been seen in longer-maturity rates, leading to a steepening yield curve. This suggests growing concerns over US fiscal policies and potential inflation risks. Notably, the rise has been driven more by real yields than by inflation expectations.
Looking ahead, market expectations for monetary policy could continue to fluctuate. The number of anticipated rate cuts in the US has already been revised down, with only one 25-basis-point cut expected by July. Investors will be closely watching the Federal Open Market Committee (FOMC) meeting minutes later this week for any further hints regarding the policy outlook.
Investors Remain Bullish Despite Risks
Despite these risks, investors remain largely optimistic for 2025, especially regarding US equities. Many are still betting on a “Goldilocks” scenario where falling prices, a resilient economy, and gradual policy easing prevail. There is widespread confidence that inflation pressures, including potential tariffs and policies under the new administration, will be manageable.
UBS Group AG strategist Gerry Fowler noted that investors are focused on real yields rather than inflation. “It’s all in the real yield and not inflation,” he said. “It’s also all in the long end and not the short end, which suggests the market is really bullish on productivity improvements in the US at this point, and has almost zero concern for tariff escalation.”
In the face of rising bond yields, the outlook for stock markets remains uncertain, and any negative growth signals could put additional pressure on equities in the near term.
