26 JUNE 2025
Long-dated bond yields have trended higher in recent weeks, ever since the Trump administration began to waver on its deficit reduction plans.
The 10yr Treasury yield is now trading well above 4% and is approaching its multi-year high around 5%. This is all in response to the massive, unfunded tax cuts included in the Republican’s budget plan and the fact the DOGE initiative has underwhelmed.
The bond market’s reaction could ultimately be problematic for equity investors.
Per the chart below, every major stock market sell-off of the past 50 years has been preceded by a sudden spike in 10yr US Treasury yields.
Encouragingly, the recent bond market weakness has been orderly (unlike in 2021/22), which reduces the immediate impact on equity prices.
Furthermore, history suggests the policymakers will soon intervene (to cap yields) should any bond sell-off become unruly.
The trillions of dollars of sovereign debt that needs to be refinanced this year remains a strong incentive for them to do so.
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