What’s Up with Yields?

The study of intermarket relationships helps us understand how different markets interact and provides clues about what to expect in different correlation regimes. There is currently much consternation about rising bond yields and their impact on stocks. We touched on the link between bond yields and stock valuations yesterday. Rising bond yields force stock investors to use higher discount rates to calculate the net present value of a company’s future earnings, which puts downward pressure on business valuations and stock prices. At the moment, bond yields are moving higher, with some concluding that the yield on the U.S. 10-year Treasury is breaking out of a triangle pattern above 4.5%.

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Stock Bond Correlation

Rising bond yields don’t always lead to stock market weakness. If bond yields are rising because of expectations for accelerating future growth, then equities can do OK too. However, if bond yields are rising for bad reasons, such as rising inflation fears, then that’s usually bad for stocks. In such a regime, you tend to see a negative correlation between bond yields and stocks, i.e. bond yields up/stocks down. That’s the regime we’re currently in as inflation rises due to the energy shock from the Iran conflict. The chart below shows that the rolling 30-day correlation between stocks and the U.S. 10-year Treasury yield is at its lowest since September 1999, at -0.68. (Hat tip to Kevin Gordon for the chart posted on X, @KevRGordon).

Previous Difficult Episodes

The chart below shows three recent episodes when bond yields rose rapidly and were accompanied by weak stock markets. Generally, the faster the rise in yields and the longer that rise persists, the stronger the headwind for stocks.

Where Next?

As noted above, the main factor driving bond yields higher today is the conflict in Iran and the consequent upward pressure on inflation caused by higher energy prices. We know that President Trump has limited tolerance for rising inflation and falling stock markets, especially ahead of November’s mid-term elections. We also know that when bond yields hit 4.5% in April 2025 as a result of his hardline tariff policy, he dialed that policy back. If he does something similar in relation to the conflict in Iran, then the study of intermarket relationships tells us to expect falling energy prices, falling bond yields, and a diminished headwind for stocks. If he doesn’t, and the 10-year yield presses on to 5%, then that could present a significant problem for equities.

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