The 30-year Treasury bond yield closed at 5.31% on Aug. 17, the highest level since June 2007, and has now held above 5% for 32 straight trading days. The last two times the 30-year yield reached similar levels, the S&P 500 and Nasdaq Composite both fell into correction within the following year.
The S&P 500 has added 12% this year and the Nasdaq Composite has gained 13%, but the bond market just flashed a signal it has produced only twice in the last two decades. Both prior instances preceded a stock market correction.
Treasury yields climb on debt, rates, and AI spending
Three forces are pushing yields higher, according to the Motley Fool. Hyperscalers and neoclouds are issuing debt to fund AI infrastructure, which has pulled demand away from Treasury bonds. At the same time, investors expect two quarter-point interest rate hikes from the Federal Reserve over the next year. That expectation reflects inflation that has stayed above target for more than five years.
National debt has also become a factor. The U.S. government's debt load recently hit $40 trillion, and investors are demanding higher yields to keep lending to a borrower that will need to issue even more bonds to cover deficits and refinance older debt. Higher yields, in turn, make bonds look more attractive relative to stocks while also weighing on consumer spending and business investment.
A rare signal with a bruising track record
The 30-year Treasury bond has paid 5.3% or more on only two trading days in the past 20 years, and Aug. 17 was one of them. The other came in June 2007 — after which the S&P 500 and Nasdaq Composite dropped 15% by March 2008.
The current streak adds a second warning. As of Aug. 19, the 30-year yield has held at or above 5% for 32 consecutive trading days, the longest such run since the summer of 2007. The last time the bond maintained at least a 5% yield for a comparably long stretch, the S&P 500 fell 18% and the Nasdaq Composite fell 16% over the following year.
History does not guarantee a repeat, and past performance never predicts future results. But with bonds now paying more relative to stocks, the setup that preceded the last two corrections has reappeared.
Source: The Motley Fool
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