Key facts
- The 10-year US Treasury yield reached 5.33%, its highest level since 2002.
- The 30-year US Treasury yield hit 5.64%, a 24-year peak.
- The S&P 500 is up 12% year-to-date and near its all-time high.
- The Nasdaq 100 has gained nearly 20% year-to-date.
- The Vanguard Total Bond Market ETF has declined 5% this year.
US stocks have largely shrugged off a significant surge in bond yields, which have reached 24-year highs, a divergence that has captured the attention of Wall Street. The benchmark 10-year US Treasury yield climbed as high as 5.33% this week, a level not seen since 2002, while the 30-year yield touched a 24-year peak of 5.64% on Thursday.
Despite the bond market sell-off, major US stock indexes remain near all-time highs. The S&P 500 is up nearly 12% year-to-date and just 2% below its record close, while the Nasdaq 100 has gained almost 20% year-to-date. In contrast, the Vanguard Total Bond Market ETF is down 5% for the year.
Several factors are contributing to this unusual market behavior. Firstly, the increase in bond yields, while sharp recently, has been relatively orderly over longer periods, allowing investors to adjust. Kriti Gupta, a global investment strategist at JPMorgan Private Bank, noted that greater volatility would be more concerning, but the current surge has not been a "shock to the system."
Secondly, strong economic growth is providing a buffer for equities. The US economy is expected to have grown at a robust pace in the third quarter, with estimates suggesting expansion at its fastest pace in over five years. This economic strength, according to Rob Haworth, a senior investment strategist at US Bank Asset Management, suggests the bond market's rise in rates reflects confidence in the economy's ability to withstand higher borrowing costs, rather than solely inflation fears.
Thirdly, corporate earnings have been robust, particularly driven by optimism surrounding artificial intelligence. Mega-cap tech companies have announced significant investments in AI infrastructure, boosting investor sentiment. JPMorgan strategists highlighted the excitement around AI developments as a key factor supporting equities amid the bond sell-off.
However, the sustainability of this divergence is a subject of debate among market professionals. While Gupta believes the market has shown resilience, she cautioned that a significant spike in bond volatility could still rattle equities. Mark Malek, chief investment officer at Siebert Financial, expressed concern that stocks would face pressure if yields remain at current levels, suggesting a "reckoning" is likely. Top economist David Rosenberg also pointed to historical parallels, noting that while the S&P 500 index remains near records, the median stock is down significantly from its 52-week high, echoing conditions seen before past market peaks.