Thursday’s selloff in long-dated U.S. government debt pushed 10- and 30-year yields further into their highest closing levels in almost seven months, creating a setup that threatens to lead to another big selloff in stocks in the days or weeks to come.
The rise in yields seen in the long end of the Treasury curve was the product of what’s known as a bear-steepener trade. Bear refers to the sentiment behind the trade, which was to sell the 10-year note BX:TMUBMUSD10Y and 30-year bond BX:TMUBMUSD30Y. Steepening refers to the resulting upward slope of the curve, in which long-dated yields rise faster relative to whatever is happening with rates on shorter-term maturities. Yields rise as prices fall on government bonds and notes.
Bond-market traders factored in a range of factors into their thinking a day after the Federal Reserve’s final decision of the year — from slower and shallower rate cuts by the central bank in 2025 to stickier inflation, continued U.S. economic strength and the prospects of tariffs and a rising federal deficit under the incoming Trump administration. Meanwhile, the 2-year yield BX:TMUBMUSD02Y remained tethered to the Fed’s near-term monetary policy stance and finished lower on the day.
Wednesday’s jump in the 10-year yield above 4.5% on an intraday basis following the Fed’s policy announcement was “significant‘’ because it added to evidence of a reversal in the downtrend that’s been in place since April, according to Adam Turnquist, chief technical strategist for San Diego, Calif.-based LPL Financial.
As the 10-year yield continued to climb past 4.5% in Thursday’s selloff, Turnquist said via phone that “the risk is to the upside for yields, with the next major resistance spot being 4.74%, or the intraday high reached in late April. If we break through that, the next logical place is a run to 5%,” a level last seen in October 2023.
Meanwhile, the story is pretty much the same for the 30-year yield, which finished above 4.7% on Thursday. It has reversed the downtrend that’s been in place since last fall and moved above its 200-day moving average. The next key area of resistance is 4.85%, or intraday highs seen in late April, and if it breaks above this, “I would expect a run to north of 5%,” Turnquist said.
The last time the 30-year rate went above 5% was in 2023, when it touched an intraday high of 5.18% in October of that year, he said.
A few worrisome signs for investors had already been brewing even before the Fed delivered its hawkish interest-rate message on Wednesday. Earlier this month, the 50-day moving averages for the 10- and 30-year yields crossed above their 200-day moving averages, suggesting that a new trend of rising yields was already forming in the bond market, according to Turnquist.
The 10-year rate also began crossing above a key resistance level of
4.3% or 4.35%
around late October to early November, before dipping back below the mark between late November and early December. It then drifted back above that level again — setting the stage for its climb above 4.5% this week.
Eric Diton, president and managing director of the New York state investment advisory firm known as The Wealth Alliance, is among the people who have warned that a 10-year yield closer to 4.5% would undermine valuations in the broader market — a scenario which came to fruition on Wednesday.
Yields that rise faster than expected are problematic for equities because they force investors to consider a higher cost of doing business for companies over the longer run and make returns on relatively risk-free government debt look more attractive.
The rise in yields “has just been too much for equities to absorb and we’ve seen that play out,” said Turnquist of LPL Financial. “The Fed captured all of the blame for the selloff in equities yesterday. But going into the Fed’s decision, breadth was already deteriorating, with fewer stocks participating in the rally and rising yields in play. We were waiting for a reality check and we got it on Wednesday.”
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U.S. stocks finished mostly lower on Thursday after failing to hold onto earlier gains. On Wednesday, the Dow Jones Industrial Average DJIA dropped by 1,123.03 points and the S&P 500 SPX and Nasdaq Composite COMP recorded their biggest point declines since 2020.
“For equity markets, we don’t think the bull market is over. We’re looking at it from a tactical standpoint to find an entry point to go to overweight from neutral,” Turnquist said.
“We don’t think we’re out of the woods yet, especially with what’s happening with interest rates,” he said. “But I would not be surprised to see a break above 4.74% on the 10-year yield, which means it could end up trading closer to 5% and that would likely lead to the next leg lower in equities. We are not calling for an end to the bull market, but probably see the next buying opportunity.”