Goldman Sachs says 10-year Treasury yield is a ‘clear issue’ for stocks | Wilnesh News

Volatility in the bond market has kept stock investors wary for months, but when will rising yields derail the stock market’s 2024 rally?

The answer is 5% 10-Year Treasury Bond Yieldaccording to Goldman Sachs. When that threshold is reached, the correlation between bond yields and stocks becomes negative, the Wall Street firm said in a new 19-page paper using market data going back to the 1980s.

“While there is no ‘magic number,'” the Goldman Sachs team wrote, “historically, rising yields have become a clear problem for the stock market when bond yields are around 5%, at which point the correlation with bond yields is weak. Then there is the decisive positive correlation.

Data showed that employee compensation costs increased more than expected at the beginning of the year, and the benchmark 10-year government bond yield jumped 5 basis points to 4.67% on Tuesday. This marks another red flag for persistent inflation, and the market believes that the Fed will remain on hold and not consider cutting interest rates until later this year. One basis point is equal to one hundredth of a percentage point.

Goldman Sachs said investors are currently in the “optimistic phase” of the cycle, with growing confidence and complacency pushing up valuations.

“Equity valuations are higher and the cycle is more mature, so equity markets are very sensitive to changes in bond yields,” Goldman Sachs said. “They underperformed as yields moved higher on news of an overheating economy and rising inflation, and when They outperform when markets price in central bank interest rate cuts.”

The 10-year Treasury yield, a key barometer of mortgage rates, auto loans and credit cards, has risen nearly 80 basis points this year as the market adjusts to a longer-term regime of higher interest rates. The current Fed funds overnight lending rate is 5.25%-5.50%.

After predicting at least six rate cuts at the beginning of the year, the market now sees a 75% chance of just one rate cut, according to widely followed data from CME Group. Fed Watch Tracker of odds derived from 30-day Fed Funds futures trading. The central bank’s interest-rate-setting Federal Open Market Committee begins a two-day meeting on Tuesday.

Billionaire investor Buffett has long emphasized the impact of interest rates on all investments, saying higher rates can exert a strong pull on asset values, reducing the present value of any future gains.

Rising yields reduce the appeal of risky assets, as Treasury bills and long-term Treasury bills offer stable yields and risk-free alternatives to stocks.

—CNBC’s Michael Bloom contributed reporting.