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Bond Market Volatility and its Impact on Stocks

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Interest Rates,Bond Yields,Stocks

As U.S. interest rates rise and bond yields reach new highs, stocks may be affected by bond market volatility. A calm bond market is crucial for all markets as borrowing costs are tied to Treasury yields. Higher volatility leads to higher risk premiums and discount rates on financial assets. The current level of bond market volatility is relatively low but has increased recently.

As implied U.S. interest rates revisit their cycle highs from last year and bond yields break out to fresh 2024 peaks, stocks may be at risk of getting vertigo.

This relative calm may quickly evaporate if inflation fears intensify, in which case a drawdown in stocks would almost certainly follow. And Wall Street is primed for a cooling-off period - the S&P 500 and Nasdaq are at all-time highs, having surged as much as 30% from their October lows. Strategists at Bank of America note that on average since 1929 the S&P 500 has had 5% daily pullbacks three times a year and 10% corrections once a year. The index has not had a 2% pullback in over 100 trading days, so a meaningful drop is probably due soon.

The upward repricing of Fed expectations and bond yields has failed to stop the equity juggernaut, with the S&P 500 and Nasdaq both advancing around 10% in the first quarter. For the equity market to really weigh down on the economy, the 10-year yield might need to rise another 100 basis points, Elliott reckons. That would smash through October’s 5.00% peak and obliterate current Fed rate cut expectations.

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