10-year Treasury yield crosses 'line in the sand' that begins to spell trouble for stocks

Dow Jones00:32

MW 10-year Treasury yield crosses 'line in the sand' that begins to spell trouble for stocks

By Vivien Lou Chen

A 4.3% level on the 10-year rate has proved to be a tipping point for equities over the past year, technical strategist says

Tuesday's bond-market selloff was pushing the benchmark 10-year Treasury yield just over 4.3%, a level which stocks have had a difficult time over the past year.

A 4.3% level on the 10-year rate is "a line in the sand for equities" and a resistance level that dates back to October 2022, according to Adam Turnquist, chief technical strategist for San Diego, Calif.-based LPL Financial. A climb above this level "seems to be pretty problematic for equity markets to absorb."

In early September 2023, for instance, the yield began an ascent above 4.3%. That was fueled by a stronger-than-expected service-sector reading for August, and the climb that served as a tipping point for what was to come the following month. The rate briefly pierced the 5% mark on Oct. 23 for the first time in 16 years. That same day, the S&P 500 finished with what was then its longest losing streak of 2023. Then, in April 2024, the yield rode another wave above 4.3% amid rising inflation risks after strong manufacturing-related data from the Institute for Supply Management. On April 25, it reached its highest closing level of 2024 at 4.706% following a hotter-than-expected annualized core PCE inflation reading for the first quarter. The S&P 500 pulled back again, ending that same month with its sharpest decline since September 2023. The Dow Jones Industrial Average also finished its worst monthly performance since September 2022.

The following chart shows how the rise in the 10-year Treasury yield during both periods translated into a corresponding drop in stocks. Declines in the S&P 500 are represented by the shaded areas in the bottom half of the chart.

On Tuesday, the 10-year yield BX:TMUBMUSD10Y touched an intraday high of almost 4.34% amid a wave of selling in U.S. government debt which began during the European session. U.S. data showed consumer confidence surged in October to its highest level in nine months, keeping the selling momentum intact heading into afternoon trading in New York. U.S. stocks DJIA SPX COMP were mixed.

The 10-year yield is now firmly above its 200-day moving average of almost 4.18%, suggesting the risks are tilting toward further upside moves. "The question is, how much higher can we go? Maybe we can revisit the April highs of 4.7% and that's going to be the last line of defense before we make a run to 5%," Turnquist said via phone on Monday.

The reason for subsequent problems in stocks boils down to the speed with which the 10-year yield is climbing and has less to do with its absolute level. Indeed, the rate held above 5% for decades prior to 2000. While it is arguable whether a return to April's high of 4.7% is what's needed to trigger bigger problems for stocks, the 10-year rate has already jumped roughly 70 basis points since mid-September, driven in part by expectations around the inflationary implications of a possible victory by Republican Donald Trump on Nov. 5 and total control of government by his party.

"We've had a very sharp move in yields and the biggest deciding factor for equities is going to be the rate of change," Turnquist said. Yields are moving higher on a variety of factors, the most important of which is improving growth expectations for the U.S., he added, saying the prospects of bigger U.S. deficits were also playing a role.

Still, continued signs of U.S. economic strength may also help to limit some of the downside risk for stocks, the strategist said.

-Vivien Lou Chen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

 

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October 29, 2024 12:32 ET (16:32 GMT)

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