Investors Are Calling the Bond Market's 'Bluff' as Yields Hit 15-year Highs

While rapidly increasing Treasury yields often cause concern among stock market investors, this week, major stock indexes have shown resilience in the face of a significant surge in rates. According to a prominent Wall Street analyst, the key lies in why investors believe rates are on the rise.

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Nicholas Colas, co-founder of DataTrek Research, explained in a note on Wednesday that the stock market is currently defying the bond market's upward momentum in rates by assuming that it is driven by momentum rather than genuine economic signals.

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On Tuesday, the yield on the 10-year Treasury note experienced a substantial increase of 13.7 basis points, reaching 4.846%, marking its highest closing level based on 3 p.m. ET data since July 25, 2007, according to Dow Jones Market Data. The 30-year T-bond yield also climbed to 4.951%, its highest level since August 2007, while the 2-year note yield rose to 5.212%, reaching its highest point since August 2006. It's important to note that yields and bond prices move inversely.

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Surprisingly, stocks displayed little movement in response to this surge in Treasury yields. The Dow Jones Industrial Average recorded a small gain, and the S&P 500 saw only a slight decline.

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Colas noted the remarkable ability of stocks to maintain their ground despite the substantial increase in Treasury yields, particularly in the wake of a robust September retail sales report. He pointed out that higher yields can often unsettle the stock market due to their historical association with economic growth dampening. Additionally, the bond market appears to be signaling that the Federal Reserve may be making a policy mistake by not taking action to raise official interest rates to cool the economy.

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As Treasury yields continued their upward march on Wednesday, stock indexes experienced modest declines but remained positive for the week.

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Colas concluded that the stock market's resilience suggests that investors are currently questioning whether the bond market truly holds the smartest insight at this moment. While the current setup is promising and aligns with seasonal patterns that tend to favor stocks toward year-end, Colas offered a word of caution. He raised concerns about the potential catalyst for lower interest rates in the near future. Geopolitical risk is at the top of the list, but it's a delicate balance between introducing just enough uncertainty to curb rising yields without spooking the equities market.

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