According to Jeff Johnson, head of fixed income products at Vanguard, the current yield level provides a "very strong insurance strategy" for bonds in a portfolio.

As bond market interest rates rise, the stock market is under pressure. Investors are waiting for the upcoming USA employment data report and for Wall Street banks to kick off the Earnings Reports season.

"Stocks have become sensitive to interest rates again," Morgan Stanley stock strategist Mike Wilson stated in a report on Monday, "Interest rates are the most important observation variable at the beginning of 2025."

The yield on the 10-year US Treasury bond has surged in the past month, slightly above 4.6% on Monday. Meanwhile, the S&P 500 Index has performed poorly over the past month.

Given the relatively high valuation of the current S&P 500, some investors are concerned that rising interest rates could impact the USA stock market. The continued rebound of the S&P 500 Index will partly depend on corporate earnings growth, with JPMorgan set to announce its fourth quarter Earnings Reports and guidance next week, while upcoming macroeconomic data may drive fluctuations in bond rates.

"We are relatively cautious about interest rates," said Tom Graff, chief investment officer at Facet, in a phone interview. He believes that as long as inflation remains generally controllable, there is no need to worry about the 10-year Treasury yield drifting to levels of 4.8%-5%.

Graff pointed out that the stock market tends to accept higher interest rates when the economy is strong and inflation is controlled, rather than seeing lower rates in a "mediocre economy." But he also warned that if interest rates rise due to inflationary pressures, it could trigger volatility in the stock market.

Investors will receive the consumer price index (CPI) reading for December on January 15, while the latest employment report from the USA will be released on Friday.

Meanwhile, Wilson pointed out that the correlation between stocks and ​Bonds yields has clearly turned negative (yield rises, stocks fall, and vice versa), a situation not seen since last summer.

He added that to see a "good is good" market backdrop return, where improvements in economic data can drive stock prices up even alongside rising interest rates, stronger evidence is needed to show that market sentiment is improving and translating into stronger economic activity. "If growth does not have this dynamic support and inflation remains stubborn, the negative correlation between stock returns and ​Bonds yields may persist."

In December of last year, the 10-year Treasury yield broke through 4.5%, leading to a narrowing breadth in the USA stock market. Wilson noted that this caused the "stock market to finish weakly in what had been an otherwise outstanding year."

According to FactSet data, the S&P 500 Index has seen annual gains exceeding 20% over the past two years. In 2024, the index rose by 23.3%, while the gain for 2023 was 24.2%.

Jeff Johnson from Vanguard stated that over the long term, returns in the stock market over the next decade may resemble those of fixed income.

He pointed out that US stocks appear to be "overvalued," whereas the current higher yields "buffer future returns from ​Bonds."

"​Bonds provide a 'very powerful insurance strategy' for the normalization of stock valuations or poor stock performance," Johnson said, "we believe that the future fixed income environment looks quite favorable."

Vanguard Group predicts that the annualized ROI of USA Aggregate Bonds over the next 10 years will be 4.5%-5%, while the expected increase in USA Stocks is between 3%-5%.

The yield on 10-year Treasury Bonds rose two basis points on Monday to 4.616%, which is 9 basis points lower than its 52-week high on April 25, 2024. Bond yields have an inverse relationship with prices.

"Predicting interest rate changes consistently in the short term and accurately capturing them in the portfolio is very difficult," Johnson said. "Even if interest rates rise, higher yields could present greater benefits for investors with a medium- to long-term investment horizon."

Vanguard's USA Investment Grade Bond Market Passive Tracking ETF had a total return of 1.4% last year, while the actively managed Vanguard Core Enhanced Bond ETF performed even better, with a total return of 2.7% in 2024.

Graff believes that the stock market is trading in an "information vacuum" while waiting for new data on fourth-quarter Earnings Reports, employment, and inflation, as well as news about the elected president Trump returning to the White House on January 20.

Meanwhile, Wilson advises investors to continue selecting quality Stocks. "The recent rise in interest rates provides another reason to choose high-quality Stocks—companies with stronger balance sheets and lower leverage may still be less sensitive to interest rates," he said.