The selloff in the US Treasury bond market continued today. The 30-year yield hit a high of 5.19%, its highest level since July 2007. The 10-year yield surged to 4.69%, its highest since January 2025 (chart). Just as unsettling as these levels is how quickly yields have risen over the past few days.
We think that happened in response to last week's hotter-than-expected April PPI as well as the latest batch of stronger-than-expected economic indicators. That combination cannot be described as “stagflation.” In fact, while some economists have warned that yields are in the "Danger Zone," we think they remain in the "Normal Zone," reflecting a resilient economy with a short-term inflation problem. The Fed should respond to the latter by raising the federal funds rate within the next two months.
Nevertheless, we expect that the economy and corporate earnings will remain resilient. Our current assessment is that the bull market isn't at risk of being derailed by the sell-off in the bond market, which presents a very good opportunity to buy both bonds and stocks.
The breakout in the 10-year yield above 4.60% suggests that the next move could be up to 4.75% (chart). If so, then a retest of the November 1, 2023 peak of 5.00% is very likely. That would mark the peak for 2026, in our opinion.
The 10-year yield has been trading within the same 4.00%-5.00% range since mid-2023, similar to the years prior to the Great Financial Crisis (chart). Hence our conclusion that yields are back to normal.
The recent ascent of the 10-year yield has been mostly attributable to the widening of the spread between that yield and the comparable TIPS yield (chart). This spread also briefly widened in response to the 2022 oil price spike.
The 2-year Treasury yield, an excellent leading indicator of the Fed’s interest rate policy, rose more than 5bps today to 4.13%, well above the upper end of the Fed's current federal funds rate range of 3.50%-3.75% (chart). The Bond Vigilantes are threatening that if the Fed doesn't tighten credit conditions, they will do so to maintain law and order in the economy!
