LiveWire

US Treasury yields have rebounded with the 2-year rising for 10th sessions in a row. Markets are concerned about: the path of inflation and labor, the Fed, and the debt ceiling. Traders may also lighten up positions as we approach the long weekend, but for now, at least in the Nasdaq, investors are cheering Nvidia's massive jump post-earnings. 

It's impossible to say where will interest rates be in 1 month, 2 years, or 5 years from now, but what we know is that assets are highly correlated. For bond investors, targeting one's desired maturity can help, but for most other asset classes, interest rates/dollar continue to be decisive in driving returns.

The S&P500 lost 2% this week on the back of rapidly climbing US Treasury yields. Traders continue to closely follow movements in yields as these represent a big risk for valuations. Yields have been climbing back up, despite inflation expectations coming down, as it is not coming down as fast as the Fed would like them to come down. Market volatility is also rising. 

Stocks and bonds are still falling together, in light of the recent climb in Treasury yields. Bonds are now close to have given up all their gains this year. Treasury yields are now 4.69% for the two-year and 3.95% for the 10-year. Investors are nervous the US Federal Reserve will be forced to raise interest rates further and keep them higher for longer, in order to cool demand and in turn tame inflation. 

Investors are now able to buy risk-free US government bonds (Treasuries) to achieve a yield of around 4.3% (2-year US Treasury yield). Compared with the S&P 500 which offers a dividend yield of around 1.7%, investors find it more attractive to increase their bond exposure. Similarly, institutional investors or other sophisticated investors may use leverage to juice up returns using bond risk exposure instead of equity. And precisely that, could continue to pressure equities lower as investors rebalance their portfolio out of equities and into bonds.