Wall Street Analyst: With US Treasury Bonds falling, US stocks should also be concerned.

The US Treasury bond yield is soaring to its highest level since October 2023, approaching a key threshold that has historically triggered stock selloffs. Behind the rise in yields is the concern that inflation is rearing its head again, as the US economy remains hot after two years of rate hikes by the Federal Reserve, and Trump's policies could lead to price increases. This rise has triggered worries, reminiscent of the recent surge in US bond yields. In October 2023, the price of 10-year US Treasuries plummeted, with yields jumping to 5%, marking one of the most severe market crashes, accompanied by brutal stock selloffs. On Wednesday, the yield on 10-year US Treasuries touched 4.73%, heading towards the key resistance level of 5%. Since the Fed began cutting rates, US Treasury yields have been gradually rising, unlike the federal funds rate, as the bond market anticipates that in the face of stubborn inflation, US Treasury yields will rise. The US December ISM Services PMI, released on Tuesday, was 54.1, significantly higher than the economists' expected 53.2. In the ISM report, the Prices Paid Index soared from 58.2 in November to 64.4, the highest level since February 2023. This latest news pushed US Treasury bond yields higher earlier this week. Wall Street's renowned strategist Yardeni said, "Bond vigilantes do not believe the Federal Reserve's esoteric argument that the federal funds rate needs to be cutbecause the so-called neutral rate is much lower than the current 4.33%. What is more important for them is that the inflation rates of the core service components of CPI and PCE still remain above 2%." In addition, the US had 8.1 million job vacancies in November, far exceeding the economists' expected 7.7 million. While strong economic data is usually good news for the stock market, when it limits the Fed's ability to cut rates, the situation is different. US bank strategist Ohsung Kwon stated in a recent report, "With the US 10-year Treasury yield stabilizing above 4.5%, we believe the market is once again entering a 'good news is bad news' environment." Goldman Sachs analysts also noted a change in the correlation between the stock market and bond yields. Goldman Sachs strategist Christian Mueller-Glissmann wrote in a report this week, "The stock/bond yield correlation has once again turned negative." He added that if yields continue to rise, there may be further room for stock price declines. After the release of strong economic data on Tuesday, expectations for two rate cuts by the Fed in 2025 were reduced to one. Just a few weeks ago, the market expected three to four rate cuts this year. The next economic data point that will impact bond yields is the December non-farm payroll report scheduled to be released on Friday. Economists expect an increase of 155,000 non-farm jobs in the US last month. Stronger-than-expected job data could trigger panic, leading to lower stock prices and higher bond yields. Kwon expects an increase of 175,000 jobs. While this is good news for the economy, such strong data may make the stock market hesitant. Kwon stated, "If strong non-farm payrolls data this Friday leads to another jump in interest rates, we believe interest rate pressure could become headwinds for the stock market, rather than tailwinds brought by an improving economy." The final factor keeping yields high is Trump's economic and legislative proposals, as investors fear this could be a catalyst for a new round of inflation. Trump has threatened to impose broad tariffs on allies and adversaries, and proposed a "great bill" to implement his agenda, including tax cuts. On Wednesday, reports said Trump was considering using emergency powers to implement his tariff plan. Additionally, a combination of tax cuts and increased government spending could lead to larger deficits, putting upward pressure on US Treasury bond yields. Investor expectations for further fiscal spending by the Trump administration may partly explain why US Treasury yields are soaring 100 basis points while the Fed cuts rates by 100 basis points. Apollo economist Torsten Slok said in a report on Tuesday, "This is very unusual. The market is telling us something, and it's crucial for investors to understand why long-term rates rise when the Fed cuts rates." From a technical perspective, Fairlead Strategies strategist Katie Stockton said the yield on 10-year US Treasury bonds is breaking through resistance levels of 4.7% and 5%. Stockton stated in a report on Wednesday, "There are signs of short-term upside exhaustion, but a decisive breakout will make it less significant."