Treasury Yields Have Started Falling, Can The Markets Breath A Sigh Of Relief?

Zinger Key Points
  • Treasury yields for the 10-year note are down 16.8% since their last peak almost one month ago.
  • As bond yields have begun to fall over the past month, stock indexes are showing signs of strength.

Yields on treasury notes are pulling back from their 2022 highs, while the stock market appears to be recovering from its 9-month-long bear run.

The yield on the 3-year treasury hovers just below the 4% mark, down 14% from this year's peak in mid-October and early November.

As compared to their latest high mark in November, yields are down 10% for the 2-year note, 16.6% for the 5-year note and 16.8% for the 10-year note, but still remain at their highest levels in over a decade.

Rising Treasury yields can be interpreted as a bad omen for the stock market, as treasury notes become more attractive to investors. This can cause some to turn away from investments that are deemed riskier than the safe and normally nonvolatile returns on bonds.

Related: 'Set Your Clock To It': 2022's Reliable Signal For When To Sell Stocks

But more powerful macroeconomic factors are also at play. The S&P 500 index, considered a gauge for the entire equity market, has been rising since early October and the Dow Jones Industrial Average officially left bear territory last week.

The tech sector, which has been among the hardest hit during the 2022 bear market, is beginning to show signs of recovery. The Nasdaq Composite —encompassing many of the largest tech companies including Apple, Microsoft, Amazon, Meta, Alphabet and Tesla — is up almost 10% since the October low.

While the yield of treasury bonds continues to rise, investors are fleeing away from corporate bond market ETFs. Last week, the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD experienced a record $3 billion in outflows in the largest single-day exodus since the fund was launched in 2002.

Meanwhile, the rise of the major indexes since October points toward investors seeing an uptick in the equity risk premium, or the measure by which the benefit of investing in stocks outweighs its risk, when compared to investing in a relatively risk-free asset like treasury notes.

But with the 10-year note yield at 3.5%, investors continue to see the allure of bonds, which is why both the stock market and the bonds market are seeing a rise in demand.

Benzinga’s take: As bond yields have begun to fall over the past month, stocks have become more attractive, evolving into a feedback loop that could turn out positively for the equity space.

Although it remains unclear how the recent market and treasury yield dynamics will be affected by another key part of the equation: the Fed's decisions on hiking interest rates in December and next year.

Photo: Courtesy of shutterstock.

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