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The U.S. 10-year Treasury yield remains on the rise at 4.77%, potentially reaching a key 5% level due to the strength shown by the country’s economy. This has dampened expectations for further interest rate cuts by the Federal Reserve (Fed).

It is possible that U.S. 10-year Treasury bonds could hit 5%, but from a medium-term perspective, these yield levels may soon appear attractive.

Although the movement in rates is significant, it is largely justified by the current economic context. For example, the official employment report for December, released last Friday, showed the creation of 256,000 new jobs. Future decisions by the Fed will depend on forthcoming data. In fact, the market is pricing in a 97.3% probability, according to CME Group’s FedWatch tool, that the Fed will pause its monetary easing process during its meeting on January 29.

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The narrative of ‘higher yields for longer’ is likely here to stay, with the central bank in a position to be patient until something changes in the economy. Investors should stay alert to any significant revisions, considering that January could bring seasonal factors that may introduce uncertainty into the figures.

Higher Yields Impact

Higher yields are generally not good for stocks because they make borrowing money more expensive. When interest rates rise, companies face higher costs for financing their operations or expansion through loans. This can reduce their profits and growth potential, which investors tend to view negatively.

Additionally, when yields rise, bonds become more attractive because they offer better returns compared to stocks. This often leads investors to shift their money from stocks to bonds, causing stock prices to fall.

Ignacio Teson

Economist and Financial Analyst

Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.