Market Momentum: A Tale of Two Assets
As the stock market hovers near record highs, fueled by the election of Donald Trump, bonds have experienced a sharp decline. This divergence has piqued the interest of investors seeking signs of a potential market correction. According to JPMorgan, the 10-year Treasury yield is a key indicator to watch for signals of Trump-trade fatigue.
The Treasury Yield Inflection Point
In a recent research report, JPMorgan’s equity-strategy team highlighted the 5% level on the 10-year Treasury yield as a critical threshold. Currently trading at around 4.3%, the team believes that a breach of this level could mark a turning point for US equities. Above 5%, the impact of bond yields on equity valuations shifts from positive to negative, raising concerns about the sustainability of the current upcycle and increasing the risk of market accidents.
Post-Election Bond Sell-Off
Government-bond yields surged following Trump’s election victory, driven by expectations of inflation and rate hikes. The 10-year note jumped 21 basis points to 4.47% in the aftermath of the election. Additionally, the prospect of “bond vigilantes” reacting to a ballooning federal deficit by selling Treasurys has added upward pressure on bond yields.
Fiscal Policy and Bond Yields
Ed Yardeni, president of Yardeni Research, warns that excessively stimulative fiscal policy, including large spending and tax cuts, could lead to even wider deficits, prompting bond vigilantes to push yields up to levels that create problems for the economy.
Market Direction: Policy Priorities
In the absence of a move above 5% in the 10-year Treasury, JPMorgan believes the market’s near- to medium-term direction will be determined by Trump’s policy priorities. If the president-elect focuses on immigration curbs and higher tariffs, stocks may struggle. Conversely, a focus on tax cuts could be a positive outcome for equities.
A Delicate Balance
As investors navigate this complex landscape, they must carefully consider the interplay between bond yields, fiscal policy, and equity valuations. The next move in the 10-year Treasury yield could have significant implications for the market’s trajectory, making it a critical indicator to watch in the coming weeks and months.
Leave a Reply