Can Wall Street keep partying while bond markets burn?: McGeever
SPY•The S&P 500 has risen around 15% and the Nasdaq almost 20% this year as Treasury yields climbed, with the 10-year term premium reaching 96 basis points, a 12-year high. The column says strong real-growth expectations may explain the divergence, but further term-premium increases could threaten stocks and bonds.
1. Stocks and yields diverge
The S&P 500 and Nasdaq have reached record peaks even as Treasury yields climbed to levels not seen in decades. The indexes are up around 15% and almost 20%, respectively, this year, while the 10-year yield has risen 120 basis points.
2. Growth drives yields
The column says inflation-adjusted real yields appear to be the primary driver of higher bond yields, suggesting investors are pricing in strong real growth. Five- and 10-year inflation breakeven rates remain below their May peaks, while the yield curve has flattened across most parts this year.
3. Term premium risk
The 10-year U.S. term premium reached 96 basis points this week, a 12-year high, based on the New York Fed's ACM model. The column says continued increases could end Wall Street's rally. It also notes that real yields are nearly 3% over the next decade and 3.5% over the next three decades.
