This is important because we have a pretty significant exposure to bonds. And when interest rates fall, bond values grow. So we are rooting for interest rate drops.
Last week was holiday-shortened and lightly attended, but despite the distractions, something notable did happen in markets: The 10-year Treasury yield rose solidly, despite soft economic data. Now, before reading too much into this, we must take into account holiday trading disruptions (lightly staffed trading desks and low volumes), but last week, the 10-year yield should have declined further and confirmed the bullish thesis for stocks: Namely that oil will drop, inflation fears will recede, rate hike worries will go away, and growth will remain solid and support risk assets.
But right now, Treasuries aren’t confirming that script. Last week’s events (stable oil prices near pre-war levels, a decline in the ISM prices index, and the soft jobs report) should have sent the 10-year yield close to or below 4.30%, not upwards to 4.50% (the 10-year yield rose 12 basis points last week).
If this persists (that the 10-year yield does not further “confirm” the bullish outlook for investors on inflation and growth), that will be a signal that the bond market is more worried about structural inflation, and that means a (much) greater chance for not just one rate hike, but an entire rate hike cycle.
That matters to us because 1) it means higher rates/ borrowing costs and 2) because the last time the Fed consistently hiked rates, the stock market dropped hard (2022). To be clear, we’re not there yet. But the movement in the 10-year yield last week was the opposite of what should have happened according to the data, and when that happens, I pay attention.
For now, it could be just a short-term, low-volume-led disruption, so it doesn’t mean much yet. However, if the 10-year yield stays stable or (worse) keeps rising above 4.50%, it’ll become a direct headwind on stocks and imply a rate hike cycle is much more likely than investors expect (which would be a clear negative for the market that isn’t priced in).
Source: Sevens Report 7-6-26