This week, the bond market is firmly bullish. The yields of benchmark 10-year Treasuries climbed to 4.64%, the highest score in a month! On the other hand, such a steady uptrend in the bond market may hinder the stock rally, experts warn.
You are certainly aware that stocks and bonds are inversely correlated. In April of this year, a significant increase in bond yields entailed a drop in stock market quotes. However, stocks sharply rebounded after the release of the inflation report because inflationary pressure in the US had been loosening its grip. Meanwhile, Federal Reserve policymakers dropped a hint that they were not in a hurry to raise interest rates again.
Currently, the fundamentals set the stage for further growth in bond yields. These conditions include a healthy US economy and the Federal Reserve's intention to wait before lowering interest rates.
Besides, bond yields are rising amid concerns about the mounting US budget deficit and weak Treasury bond auctions. Some analysts predict that the stock market is likely to burst into high volatility soon if the 10-year bond yield reaches 4.7%. At the moment, the rise in yields is not alarming the market, whereas a level of 4.7% and above could substantially affect investment returns.
It is common knowledge that increasing yields lead to higher borrowing costs for consumers and businesses. This makes a dent in corporate profits, experts explain. Additionally, higher yields create greater investment competition for stocks as Treasury bonds are considered less risky assets.
