The significant rise in U.S. policy rates and bond yields this decade has periodically raised concerns that monetary conditions were becoming restrictive and/or bond yields were overshooting, increasing the odds that the economic and investment cycles would soon end. We have repeatedly disagreed, and so have risk asset markets, as well as the U.S. and global economy.
A just-published report updated our outlook for the U.S. Treasury market, Fed policy and inflation. It (again) concluded that higher bond yields loomed. The more the Fed et al proceed cautiously, the greater the risk that this year’s so far orderly rise in Treasury yields could turn disorderly with yields (finally) overshooting.
This year’s rise in U.S. and global bond yields has not been sufficient to halt the ongoing bull market in equities. However, if this decade’s pattern continues, a breakout in the benchmark 10-year Treasury yield to a new high for the cycle would significantly increase the odds of a setback in stocks. Stay tuned.
