Wall Street is having a topsy-turvy moment.
Long-term Treasury yields have shot up dramatically, and investors in stocks are cheering the bond market’s big moves. That doesn’t happen often. So what gives? Rising rates are supposed to be a bad sign for stocks. In theory, higher yields for the 10-year US Treasury should make it more expensive to get mortgages and other types of consumer and business loans.
Spiking bond yields are also often associated with higher inflation — a big problem for consumers lately — and they are rising now amid concerns that the Federal Reserve will jack up short-term interest rates to keep surging prices in check. That’s also not a welcome sign for stocks. Granted, rates are still historically low, with the 10-year currently yielding only about 1.69%. That’s a reason why Peter Wilson, global fixed income strategist with the Wells Fargo Investment Institute, recently called the relationship between yields and high inflation an “odd couple.”
But look at how far and how quickly rates have risen in a short period of time. The 10-year yield is up from 1.51% last Friday and was a mere 0.92% at the end of 2020. That means bond yields have shot up more than 10% in just a few days and 80% in a little more than a year. It appears that investors don’t expect bond yields to climb much higher from current levels though, even if the Fed raises short-term rates several times this year. That could fuel further gains in the stock market.
Ameriprise chief market strategist David Joy wrote in a 2022 outlook report this week that bond yields “are expected to come under further upward pressure” this year. He believes they may top out around 2%, which would lead to “uninspiring returns” from Treasuries. Few are predicting the type of shock that would lead bond yields to move substantially higher. Experts believe stocks still look more attractive than bonds because the global economy is expected to continue its recovery from the Covid-19 pandemic.