The yield on USA Treasury bonds is rapidly rising to its highest level since October 2023, approaching a key threshold that has historically triggered stock market sell-offs, leading to panic in the market.
The reason behind this rise in yields is the worry over rebounding inflation, while the economic policies of President-elect Donald Trump may further drive up prices, adding to market concerns.
A similar situation occurred in October 2023. At that time, the yield on the 10-year USA Treasury bonds soared to 5%, leading to a sharp drop in bond prices and triggering a significant sell-off in the stock market, marking one of the most severe market crashes in recent years.
The yield on the 10-year USA Treasury bond is approaching the key resistance level of 5%.
As of Wednesday (January 8), the yield on the 10-year USA Treasury bond has risen to 4.73%, moving towards the key resistance level of 5%. Since the Federal Reserve began to lower interest rates, despite the reduction in the federal funds rate, long-term USA Treasury bond yields have continued to rise. This divergence indicates that the bond market is concerned about stubborn inflation and higher future interest rates.
The December ISM Services report released on Tuesday showed that the services activity index recorded 54.1%, higher than the market expectation of 53.2%. Among them, the Prices Paid Index surged from 58.2% in November to 64.4%, reaching the highest level since February 2023, further pushing up USA Treasury yields.
"Bond Vigilantes" question the Federal Reserve's logic on interest rate cuts.
Ed Yardeni, founder of Yardeni Research, stated that the Bond Vigilantes do not agree with the Federal Reserve's rate cut rhetoric. Federal Reserve officials believe that the current federal funds rate needs to be lowered because the neutral rate is below the current level of 4.33%. However, bond market investors are more focused on the fact that core service inflation remains well above the 2% target.
"The stickiness of core service inflation is much stronger than the Federal Reserve expects," noted Yardeni. "The bond market watchers are not buying it."
Strong economic data limits the Federal Reserve's room for interest rate cuts.
Data from the USA labor market is also suppressing rate cut expectations. The job openings (JOLTS) data for November reached 8.1 million, far exceeding the market expectation of 7.7 million.
Although strong economic data is usually seen as bullish news, when such data limits the Federal Reserve's room for rate cuts, it is no longer good news for the stock market.
Bank of America strategist Ohsung Kwon pointed out in a recent report: "When the 10-year Treasury yield breaks above **4.5%**, the market enters a 'good news means bad news' state again."
The correlation between stocks and bonds has turned negative, analysts warn of increasing risks.
Goldman Sachs analyst Christian Mueller-Glissmann pointed out that the correlation between the stock market and bond yields has turned negative again, which means that if Treasury yields continue to rise, stock prices may decline further.
"We believe that if Treasury yields continue to rise, the downside risk for the stock market will increase," Mueller-Glissmann wrote in a report this week.
The market adjusts interest rate cut expectations, focusing on.Non-farm Employment Data
After the release of economic data on Tuesday, the market's expectations for the Federal Reserve to cut interest rates in 2025 were reduced from two times to once. A few weeks ago, the market still expected three to four rate cuts this year.
Next, the market will closely watch the non-farm payroll data for December to be released on Friday, as this data will directly impact the direction of US Treasury yields.
The market expects 0.155 million new jobs to be added in December. If the employment data is stronger than expected, it could trigger a market sell-off, driving US Treasury yields further upwards.
Kwon from Bank of America predicts that the new jobs added in December will reach 0.175 million. He cautioned that although this is bullish news for the economy, it could have a negative impact on the stock market.
"If Friday's non-farm payroll data pushes rates higher again, we believe this will pose greater pressure on the stock market than the bullish aspects of the economy," Kwon said.
Trump's policies have raised concerns about inflation, pushing US Treasury yields higher.
Concerns about Trump's economic policies are also one of the important reasons for the rise in USA Treasury yields. Trump has threatened to impose broad tariffs on allies and competitors and proposed a "big and beautiful plan" to push for his tax reform and fiscal stimulus plans.
According to CNN reports on Wednesday, Trump is considering using emergency powers to implement his tariff plans. Following this news, the stock market fell, and USA Treasury yields rose further.
In addition, the combination of tax cuts and high government spending may increase the fiscal deficit, which will also put upward pressure on USA Treasury yields.
Analyst viewpoint: The unusual rise in long-term yields deserves attention.
Torsten Slok, chief economist of Apollo Group, pointed out that despite the Federal Reserve lowering interest rates by 100 basis points in recent months, the 10-year USA Treasury yield has increased by 100 basis points, a phenomenon that is "extremely unusual."
"The market is sending us a signal," Slok wrote in a report on Tuesday. "Investors need to figure out why long-term yields continue to rise in the context of the Federal Reserve lowering interest rates."
Technical analysis.: USA Treasury yields face key resistance levels.
Analyst Katie Stockton from Fairlead Strategies stated that from a technical perspective, the 10-year US Treasury yield is approaching a key resistance level of 4.7%-5%.
"In the short term, we see signs that upward momentum is already exhausting," Stockton pointed out in a report on Wednesday. "However, if the resistance level is broken, this signal will be weakened, and the yield may continue to rise."
