The stock market embraced higher yields. Now it fears them.
Subscribe to enjoy similar stories. The 10-year bond yield came within a whisker of its high from last April on Wednesday morning, and stocks, especially smaller stocks, didn’t like it one bit. It is part of a switcheroo by investors over the past month.
They have shifted from thinking that higher Treasury yields are just an unwelcome side effect of the stronger growth promised by president-elect Donald Trump, to worrying that higher borrowing costs might end up being very important. If the concern is right, get ready for a bumpy ride in 2025. The story really starts with the excitement in the run up to, and shortly after, the election.
Stocks and bond yields both soared, as investors anticipated a ton of good stuff from a new Trump administration: deregulation and lower taxes to boost growth and tariffs to extract concessions from other countries. Higher bond yields didn’t matter with so much good stuff to dream about. It took only a few weeks for reality to kick in.
Trump might not do only the good stuff, with promised deportations and permanent, rather than negotiable, tariffs pushing growth down and inflation up. Just as bad, the risk is growing that the economy can’t cope with much of the good stuff. When the economy grows faster than is sustainable the result is either inflation or higher interest rates, or both.
Bond yields rose in anticipation. By Christmas smaller stocks and the equal-weighted version of the S&P 500—which treats pipsqueaks the same as the Big Tech stocks that dominate the normal index—were both below pre-election levels. Meanwhile Treasury yields leapt, on their way to the 4.7% they hit this week.
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