Bond Yields Send Stock Market into Turmoil

Bond yields experienced a significant surge this week, which consequently had a downward impact on the stock market. However, despite the apparent alarm bells, there is no need to be overly concerned.

Undeniably, yields are in motion. The 10-year Treasury has risen from 3.9% to approximately 4.19% over the course of the week, while the 30-year yield saw an increase from around 4% to 4.28%. Some have attributed this rise to Fitch Ratings downgrading U.S. government debt from AAA to AA+. Fitch justified its decision by pointing to a "steady deterioration in standards of governance" following the recent debt-ceiling standoff. However, a more likely cause is the announcement that the U.S. will be selling more debt this quarter, coupled with relatively strong economic data.

Although this surge in yields led to a decline in the stock market, with the S&P 500 dropping by nearly 2% from its recent peak, including a particularly rough Wednesday of selling, it is important to note that the increase in bond yields poses no real threat. JPMorgan CEO Jamie Dimon dismissed Fitch's downgrade as absurd during a CNBC interview, and he is not alone in holding that viewpoint.

Tom Essaye of Sevens Report concurs, stating, "I tend to agree. While there are legitimate concerns about dysfunction within the U.S. government, this is not new nor sufficient grounds for downgrading U.S. debt."

In reality, the market seems to be adapting to the additional supply that will soon flood it. Yields have already stabilized at crucial levels, with the 10-year yield plateauing near its post-pandemic peak of just over 4.2%, and the 30-year yield remaining steady just below its high of slightly above 4.3%.

Consequently, this stabilization in yields has had a positive effect on the stock market, which is also beginning to find its footing. The S&P 500 has settled at around 4500, a level where buyers previously intervened and drove the index higher in early July. This fact remains true even now.

Therefore, this week's knee-jerk reaction to bond yields is merely a temporary disruption. Now, let us return to our regularly scheduled program.