The next "explosive" threshold for the market in U.S. Treasuries will be 4.75%?

Recently, the yield on the 10-year U.S. Treasury bond has risen significantly, raising concerns in the market about the outlook for the stock market.

The "Christmas rally" that investors were looking forward to did not materialize as expected. After the S&P 500 index fell by 1.1% last Friday, U.S. stocks continued to decline on Monday.

Analysts pointed out that the rise in bond yields is one of the main reasons for the cautious sentiment in the market. Although the Federal Reserve has cut interest rates, the yield on the 10-year U.S. Treasury bond has increased by nearly one percentage point since September, reaching a seven-month high last Friday. This change has raised concerns about the future performance of the stock market.

In addition, the market is also worried that the tariffs and tax cuts proposed by the new President Trump may exacerbate inflationary pressures, coupled with the increase in government deficits that could lead to a rise in bond supply, further depressing bond prices.

The strategist team led by Julian Emanuel at Evercore ISI stated last Sunday:

“In the long run, corporate earnings remain the main driver of the stock market, but even if the overall environment remains favorable, rising long-term yields may exert mid-term pressure on the stock market. After entering 2025, the rise in bond yields will become the biggest challenge facing the U.S. stock bull market.”

Short-term pullback may occur, but mid-term risks remain

Emanuel believes that benchmark yields may experience a pullback in the short term due to the high short positions in the Treasury market, which may lead to short covering. At the same time, geopolitical tensions in oil-sensitive regions may ease, reducing inflation concerns. However, Trump’s policies, the fiscal deficit issue, and expectations that Japan may reduce its purchases of U.S. Treasury bonds will continue to drive bond yields higher in the mid-term, so he expects increased volatility in the bond and stock markets early next year.

He further pointed out that the pressure from rising bond yields on the stock market is ever-present, regardless of whether stock market valuations are high. Emanuel noted that whether in 2018 (when stock market valuations were relatively low) or in 1994 and 2022 (when stock market valuations were high), the rise in bond yields would exert pressure on the stock market.

Emanuel emphasized that over the past few decades, there has not been a fixed "threshold" for the 10-year U.S. Treasury yield, meaning that exceeding a certain level does not necessarily lead to a stock market pullback. This "trigger level" can vary significantly over different periods. For example, a 3% yield in 2018 put pressure on the stock market, while in 1994, this level reached 6%.

In the current cycle, Emanuel believes that if the yield on the 10-year Treasury bond remains below 4.5%, the stock market still has the ability to overcome pressure and continue to rise. However, if the yield breaks 4.75%, it may trigger a longer and deeper adjustment in the stock market.

Emanuel observed that since the end of the bond bull market in 2020, the stock market has cumulatively risen by 117% over 1,754 days. However, during the 89 days when the yield on the 10-year Treasury bond exceeded 4.5%, the stock market fell by 2.1%. In the 20 days when the yield reached or exceeded 4.75%, the stock market fell by 3.7%. He also warned that if the yield on the 10-year Treasury bond breaks 5%, it could pose a greater threat to the bull market, similar to the 3% yield level during Trump’s second year in office in 2018 Despite facing pressure from rising bond yields, Emanuel and his team remain optimistic about the stock market outlook in late 2025. They expect that although there may be volatility in early next year, after a short-term adjustment, the S&P 500 index is expected to reach 6,800 points by 2025. They believe that the likelihood of yields breaking through high thresholds is low, thus maintaining a positive attitude towards the long-term trend of the stock market