Market Turbulence Ahead: Yields May Reach Critical Level
The recent Treasury market upheaval sparked by Donald Trump’s presidential win has raised concerns among top bond experts. They warn that yields could surge to a level that might threaten the stock market’s record-breaking streak.
Rising Yields: A Threat to Equities?
Bond prices plummeted immediately after Trump’s victory, driven by speculation about his inflationary policies, including tax cuts and import tariffs. Although 10-year yields have retreated from their peak of 4.48%, they could still reach 5% if Trump’s expected policies are implemented, according to Bob Michele, JPMorgan Asset Management’s chief investment officer.
A Critical Threshold
Michele believes that a 5% yield would be a challenging level for markets to absorb, potentially triggering a shift of cash from equities into bonds. Vincent Mortier, Amundi SA’s chief investment officer, shares this concern, highlighting the significance of this threshold.
Short-Term Expectations
In the near term, Michele expects 10-year yields to stabilize around 4% as investors take advantage of the bond market dip. However, once the new administration takes office and concrete policy proposals are put forward, the selloff could regain momentum.
Impact on Stocks
So far, the bond market’s volatility has not yet affected stocks, which have surged to new record highs. Optimism about potential corporate tax cuts and deregulation has fueled the rally, putting the S&P 500 on track for its best weekly performance of the year.
Equities Outlook
Paul Quinsee, JPMorgan Asset Management’s head of global equities, sees less risk to stocks from rising bond yields. He anticipates that strong corporate profits will continue to support equities, with earnings growth expected to reach 12% to 13% next year.
Caution Ahead
However, Michele is more cautious, warning that if Trump’s policies lead to higher inflation, the Federal Reserve will need to respond, potentially pushing rates higher. He believes that at some point, yields will reach a level that even strong earnings and stock market valuations won’t be able to absorb.
Leave a Reply