Treasury Threshold Triggers Stock Market Meltdown

This is the level where the 10-year Treasury yield becomes a ‘clear problem’ for stocks, Goldman study shows

The bond market’s volatility has been a concern for stock investors.

Goldman Sachs has identified 5% as the threshold for 10-year Treasury yields at which this relationship becomes a significant issue.

Historically, this point triggers negative correlation between bond yields and stock performance.

Currently, the 10-year yield is approaching 4.7%, driven by signs of persistent inflation.

In the current market cycle’s “optimism phase,” valuations are elevated and more sensitive to yield fluctuations.

Higher yields usually lead to underperformance in equities, while expectations of rate cuts boost them.

Goldman warns that equity valuations are currently sensitive to bond yield movements, especially with the Fed maintaining higher-for-longer interest rates.

The market is now anticipating only one rate cut in 2024.

The impact of interest rates on investments, according to Warren Buffett, should not be overlooked.

Rising yields reduce the present value of future earnings, making riskier assets like stocks less appealing compared to the risk-free returns offered by shorter-term or longer-term Treasury instruments.

Overall, the correlation between bond yields and stocks will become a concern once the 10-year Treasury yield reaches 5%, which indicates the maturity of the economic cycle and heightened sensitivity of equity markets to interest rate changes.