Last week U.S Treasury bonds sold off across the entire curve. The 2-year rose 11 basis points to 4.86%, the 10-year surged 22 basis points to 5.17%, and the 30-year advanced by 19 basis points to 5.49%. Those Friday closing levels were off the weekly highs as short covering, and the hopes rose for a settlement to the Iran War after comments from the Iranian foreign office. On Saturday Trump rejected the Iranian offer, but he later stated that talks will continue in the coming week.
What was notable is
the bond yields have become more detached from oil prices as investors and
traders are beginning to recognize that underlying inflation is more embedded
than previously thought, fiscal deficits are getting worse, the economy may be
stronger than the current consensus, and there are far more uses of funds than
there are sources of funds. Meantime, the market is pricing two more rate hikes
from the Fed with one coming as early as late next month. (See:
As longtime readers of Shulmaven know, we have been arguing that we are in a secular bear market for bonds. (See for example: https://shulmaven.blogspot.com/2025/01/we-are-in-early-stages-of-bond-bear.html ) The current bear market began in August 2020 when the 10-year U.S. Treasury bond yield bottomed at 0.55%. We are now in the seventh year of the bear market, and we would note that the last bond bear market lasted for 35 years, 1946-1981. Thus, in our opinion, we are still in the initial stages of the secular bear market in bond
That said, long term
market moves are never in a straight line. It is likely that the recent backup
in rates will break a significant sector in the financial markets before too
long. Thus, while I think we are on the road to much higher interest rates that
will make today’s yields look low, it is not out of the question that a
countertrend rally could soon begin. My guess is that will happen around a 6%
yield for the 10-year U.S. Treasury Bond.
While the S&P 500
has been seemingly immune from the bond market route as earnings are on pace to
increase 33% this year, the forward price-earnings ratio of the index has declined
from 22 times to 19 times. As long as the strong earnings momentum continues stocks
are likely to hold up reasonably well. However, once a crack appears in the
earning cycle, stock market investors will take note of the high bond yields,
and we will face a Wile E. Coyote moment.
