Market Jitters: The 10-Year Treasury Yield’s Impact on Investors
As the 10-year Treasury yield inches closer to 5%, investors are growing increasingly cautious. But what’s driving this unease? To understand, let’s dive into the numbers.
A Historical Anomaly
The 10-year Treasury yield has averaged 2.91% over the past two decades, according to DataTrek co-founder Nicholas Colas. The current rate is an outlier, making investors nervous. This unfamiliar territory raises questions about the impact of higher rates on the stock market.
The TINA Effect
For years, low rates have enticed investors to seek gains in the stock market, with the “there is no alternative” (TINA) narrative dominating the scene. However, with yields now approaching 5%, the risk-free asset is becoming a more attractive option. As Jurrien Timmer, director of global macro at Fidelity Investments, notes, “Stocks have to compete with what we consider to be the risk-free asset.”
Higher Rates, Higher Risks
Higher borrowing costs can weigh on economic activity and company profits, making it a challenging environment for stocks. The S&P 500’s current high valuation, with a forward 12-month price-to-earnings ratio of 21.5, is also being challenged by these rising rates.
Uncertainty Reigns
The rise in the 10-year yield is a clear depiction of the growing uncertainties in markets. Concerns about sticky inflation, the Fed’s interest rate decisions, and geopolitical tensions are all contributing to the yield’s spike. Investors are left wondering what’s driving the rise and when it will stop.
A Shift in the Landscape
RBC Capital Markets head of US equity strategy Lori Calvasina notes that the market has largely been in a “secularly declining interest rate environment” over the past 20-plus years. The key fear now is whether this is changing. If rates continue to rise, it could signal a structural shift, flipping traditional modeling on its head.
It’s Not About the Level, It’s About Uncertainty
As Truist co-chief investment officer Keith Lerner points out, the 10-year Treasury yield has averaged 6.2% from 1950 to 2007, with the S&P 500 posting an average annual return of 11.9% over that time. The current rates story is about uncertainty, and the rise in rates is a reflection of the angst brewing among investors in 2025.
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