Inside Markets — Bond Yields

The tactical backup in Treasury yields from oversold levels looks to extend in the days/weeks ahead with more curve steepening. Fed policy easing (50bp expected in ’25) should contain 2-year yields to levels below 4.38%, while longer-dated yields look like they’ll test YTD highs from late April. Our outlook for more curve steepening, absence of short-term oversold conditions (bond prices) and post-FOMC catalyst vacuum will likely result in higher yields through year-end.

The backup in bond yields from mid September-mid November stopped short of triggering a volatility induced sell-off in equity markets. At the time, we identified the breaking point in 10-year terms as levels >4.60%. Equity markets can usually withstand rising yields if it happens over long periods of time. But sharply higher yields in a short span of time increases the risk of bond market volatility spilling into equity markets. The pullback in yields that occurred from mid-November reset the level higher to 4.91%, but expect headwinds to become apparent above 4.70%. The recent rise in bond yields is the fundamental driver behind the relative outperformance of secular growth stocks (Tech) over cyclical/value groups (Financials, Industrials, Materials).