Treasury Yields and Dollar Levels Pose Challenges for Stocks, Analyst Says
Stocks kicked off a holiday-shortened week on a positive note Monday, but the ongoing rise in Treasury yields and the U.S. dollar could hinder the stock market‘s upward momentum, according to a well-known market analyst.
The bond market and the dollar continued their upward trend Monday, trading at levels that may complicate the efforts of stock-market bulls. Last Wednesday, both surged after the Federal Reserve signaled it plans to implement fewer interest-rate cuts in 2025 than previously expected.
The 10-year Treasury yield climbed to 4.594%, marking its highest close since late May, based on 3 p.m. Eastern time data from Dow Jones Market Data. Similarly, the ICE U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, rose 0.4% to 108.09—just shy of Friday’s peak of 108.54, its highest level since November 2022.
Despite a pullback last Friday following a reassuring inflation report, both yields and the dollar resumed their climb Monday. Notably, Treasury yields move inversely to bond prices, while a stronger dollar typically weighs on stock valuations.
Tom Essaye, founder of Sevens Report Research, characterized the 10-year yield and the dollar as “mild” headwinds at their current levels but warned that their impact could intensify if they climb further.
Stocks managed to shrug off these headwinds Monday in light preholiday trading. The Dow Jones Industrial Average rose nearly 100 points, or 0.2%, while the S&P 500 gained 0.8%, supported by strong performance in chip stocks. The Nasdaq Composite led the charge with a 1% increase.
Despite Monday’s gains, major indexes remain down for the month, with last week marking a period of losses. However, the S&P 500 is still on track for a remarkable 2024 gain exceeding 25%.
A notable shift in the bond market was observed last week as the yield curve—the spread between short-term and long-term Treasury yields—returned to its normal shape after an extended period of inversion. While inverted yield curves are often seen as recession indicators, analysts highlighted that it’s typically the end of an inversion that precedes economic downturns.
Lisa Shalett, CIO at Morgan Stanley Wealth Management, noted that the normalization of the yield curve signals a shift from a disinflationary growth environment to one characterized by reflationary growth. This transition could pressure valuations of long-duration stocks.
Higher long-term yields are particularly challenging for equities as they reduce the present value of future corporate profits, making high stock valuations harder to justify.
According to Essaye, the trajectory of both the dollar and Treasury yields will likely determine the market’s near-term direction. “Calm currency and bond markets are what stocks need to continue to rally, and we got the opposite last week,” he said, adding that reassurances from the Fed or positive economic data would help stabilize the situation.
