Wall Street analysts: With the decline in U.S. Treasury bonds, U.S. stocks should also be concerned

Zhitong Finance has learned that U.S. Treasury yields are soaring to their highest levels since October 2023, approaching a critical threshold that has historically triggered sell-offs in U.S. stocks. The rise in yields is driven by concerns that inflation may soon resurface, as the U.S. economy remains robust following two consecutive years of interest rate hikes by the Federal Reserve, and Trump's policies could potentially lead to soaring prices.

This increase has raised concerns, reminiscent of the recent surge in U.S. Treasury yields. In October 2023, the price of 10-year U.S. Treasuries plummeted, with yields jumping to 5%, marking one of the most severe market crashes accompanied by brutal sell-offs in the stock market. On Wednesday, the yield on 10-year U.S. Treasuries reached 4.73%, moving towards the critical resistance level of 5%. Since the Federal Reserve began cutting rates, U.S. Treasury yields have been rising slightly, differing from the federal funds rate, as the bond market anticipates that U.S. Treasury yields will rise in the face of stubborn inflation.

The U.S. ISM Services PMI for December, released on Tuesday, was 54.1, significantly higher than economists' expectations of 53.2. In the ISM report, the prices paid index surged from 58.2 in November to 64.4, the highest level since February 2023. This latest news propelled U.S. Treasury yields higher earlier this week.

Wall Street's well-known strategist Yardeni stated, "Bond vigilantes do not believe the Federal Reserve's esoteric claim that the federal funds rate needs to be lowered—because the so-called neutral rate is far below the current 4.33%. More importantly for them is that the inflation rate of the core services components of the CPI and PCE remains above 2%."

Additionally, the U.S. JOLTs job openings for November showed 8.1 million vacancies, far exceeding economists' expectations of 7.7 million. While strong economic data is usually good news for the stock market, this is not the case when it limits the Federal Reserve's ability to cut rates. Bank of America strategist Ohsung Kwon stated in a recent report, "As the yield on 10-year U.S. Treasuries remains above 4.5%, we believe the market is once again entering an environment where 'good news is bad news.'"

Goldman Sachs analysts have also noted a change in the correlation between the stock market and bond yields. Goldman strategist Christian Mueller-Glissmann wrote in a report this week, "The stock/bond yield correlation has turned negative again." He added, if yields rise, there is further room for stock prices to decline.

Following the release of strong economic data on Tuesday, expectations for the Federal Reserve to cut rates in 2025 have decreased from two times to one. Just a few weeks ago, the market anticipated three to four rate cuts this year. The next economic data point that will impact bond yields is the non-farm payroll report for December, scheduled for release on Friday. Economists expect that U.S. non-farm payrolls increased by 155,000 last month Stronger-than-expected employment data may trigger panic, leading to lower stock prices and higher bond yields.

Kwon expects an increase of 175,000 jobs. While this is good news for the economy, such strong data may deter the stock market. Kwon stated, "If strong non-farm payroll data this Friday drives interest rates to jump again, we believe that interest rate pressure may become a headwind for the stock market, rather than a tailwind from economic improvement."

The final factor keeping yields high is Trump's economic and legislative proposals, which investors fear could become a catalyst for a new round of inflation. Trump has threatened to impose broad tariffs on allies and adversaries and has proposed "a grand plan" to implement his agenda, including tax cuts. On Wednesday, media reports indicated that Trump is considering using emergency powers to implement his tariff plan. Additionally, the combination of tax cuts and high government spending could lead to larger deficits, which would also put upward pressure on U.S. Treasury yields.

Investor expectations for further fiscal spending under the Trump administration may be part of the reason why U.S. Treasury yields soared by 100 basis points while the Federal Reserve cut rates by 100 basis points. Apollo economist Torsten Slok stated in a report on Tuesday, "This is very unusual. The market is telling us something, and it is very important for investors to understand why long-term rates rise when the Federal Reserve cuts rates."

From a technical perspective, Fairlead Strategies strategist Katie Stockton noted that the 10-year U.S. Treasury yield is breaking through resistance levels of 4.7% and 5%. Stockton stated in a report on Wednesday, "There are signs that short-term upside potential is running out, but a decisive breakout would make it seem less important."