Bond sell-off continues as 10-year yield hits 5.19%
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Another day, another tough session in the bond market, with yields on U.S. government debt continuing to push toward levels seldom seen in decades.
The latest: The yield on the 10-year note rose to roughly 5.19% in late afternoon trading in New York, the highest closing level since July 2007.
Driving the news: It's the same old story.
- The Iran war and associated energy shocks — diesel at about $6.50 a gallon and regular gasoline at $4.50 a gallon, according to AAA — are feeding what seem like serious inflationary pressures.
- As a result, traders are growing more confident that the Federal Reserve will raise interest rates at its next two meetings.
- Elsewhere, the deteriorating profile of the U.S. government's finances and competition for bond investor dollars from AI are adding to pressure.
What we're watching: If and when the stock market will start getting indigestion as rates keep climbing. On Thursday, the S&P 500 was basically flat.
What they're saying: JPMorgan market analysts recently looked at the relationship between key interest rates — like the yield on the 10-year — and the valuation of the S&P 500.
- "Based on ~80 years of historical analysis, there is an inverted 'U' relationship between the 10-year bond yield and S&P 500 multiples," they wrote.
- "During periods of above-trend EPS growth (~15% y/y), 10-year yields can continue to rise to ~5% before the equity multiple starts to de-rate."
The bottom line: Even with the ruckus in the bond market, ongoing wars and growing consumer pain from higher rates and energy costs, we're only about 1% below the all-time high for blue-chip stocks, which seems kind of remarkable.
- But that's likely because expectations for profits are still sky-high, with Wall Street analysts predicting that S&P 500 earnings per share in the third quarter this year will be up about 29% compared with the same quarter last year.
