The bond market could give stocks another headache. The U.S. 10-year Treasury yield climbed to its highest level since 2007 this week. Meanwhile, the 30-year Treasury yield reached its highest point since 2011. Both have been rising after surprisingly hawkish minutes from the Federal Reserve’s July meeting, worrying investors the central bank could keep rates higher longer than previously anticipated. This comes during a tough time for the stock market. The S & P 500 is down 4% in August, on track to snap a five-month winning streak. It would also be the benchmark’s biggest one-month decline since December, when it dropped 5.9%. What’s more, higher yields are typically a negative for tech and growth stocks — this year’s best-performing group — as the lessen the value of their promised future earnings. And some on Wall Street think yields can rise even more from here. Ned Davis Research’s Joseph Kalish said Monday he expects the 10-year Treasury yield could rise to 5.25%, citing risks to the bond market on inflation expectations. US10Y YTD mountain U.S. 10-year Treasury yield YTD “The market has been consistently underpricing the risk of additional rate hikes and overpricing the speed of rate cuts,” Kalish wrote. “Nevertheless, the market has been steadily pushing out rate cuts, but is still only assigning around a 40% chance of another rate hike this year.” “As Q4 inflation numbers come through, the market runs the risk of reassessing the probability of another rate hike,” Kalish added. Meanwhile, Strategas’ Chris Verrone said Tuesday he’s looking at the 5%-5.25% range as the next key level to watch for the benchmark yield. He also noted the recent breakout is reminiscent of one seen in 1987. “Yields broke out on August 27th, 1987, and rallied 133bps over the next 33 trading days from 8.90% to 10.23%,” he said. “In today’s terms, that would roughly be the % equivalent of 10s trading to about 4.90% by early-October.” “There are serious differences from ’87 to be sure, but we found some historical value in digging into this comp over recent days at a minimum,” Verrone added. Implications for stocks According to Wolfe Research’s Chris Senyek, this move higher in yields could mean more pressure on stocks over the near term. Still, he said the curve is likely to reverse course as recession fears start to hit, possibly in the fourth quarter. Morgan Stanley’s Matthew Hornbach echoed that sentiment. He said Friday that moves in August tended to reverse in September. Historically speaking, it’s done so in eight out of the last 10 years. The strategist said that “leaves the door open for a reversal toward lower yields in September, as investors return from their August breaks, and fundamentals take center stage again.” Still, Tom Essaye of The Sevens Report thinks investors should remain alert as yields keep climbing. “The bottom line is that if yields continue to rise it will be an increasingly stiff headwind on stocks, and while they won’t cause a correction by themselves they will make it very difficult for stocks to log a substantial rally,” he said. — CNBC’s Michael Bloom and Chris Hayes contributed to this report.
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The 10-year Treasury yield hit its highest level since 2007. What it means for stocks
