The first-half of the year was defined by stock market strength and bond market wobbliness. In the second-half of the year, we are seeing an inversion of sorts as the bond market has weakened, while the stock market has been giving back recent gains.

This is a natural consequence of the market consensus being upended as it’s clear that the Fed is not going to budge from its ultra-hawkish stance for at least the rest of the year, inflation is stickier than expected, and that the economy is resilient enough to continue evading a recession. Treasury yields are also responding with the 2-year note yield reaching 5%, and the 10-year yield breaking out above 4.2%. 

Previous instances of Treasuries reaching these levels have resulted in equity weakness as it portends greater stress for banks, housing, and other parts of the economy. However according to Yardeni Research, bond weakness is more driven by a widening federal deficit and a better than expected economy. Another factor is the ‘pricing out’ of pivot in Fed policy from the second-half of this year to later in 2024. 

The firm sees the market continuing to rise despite yields remaining elevated and believes the S&P 500 will make new highs next year. 

Finsum: US Treasury yields are rising and leading to a pullback in the stock market. Some of the factors are the resilience of inflation, a stronger than expected economy, and a wider than expected federal deficit.