Yield Interruptus

For the sixth time, the contemporary bull market is being rudely interrupted by a cranky bond market.

The 10-year U.S. Treasury Bond Yield has surged from about 3.6% in mid-September to 4.38% last Friday!  This eye-catching rise in bond yields during the last six weeks is at odds with an economic and financial market environment appearing fairly sublime. 

The Federal Reserve recently began easing short-term interest rates, inflation continues to moderate, economic growth shows no signs of an imminent recession, real GDP growth rose by 2.8% in the third quarter boosted by a solid 2.5% rise in productivity, the jobs market has slowed but is still growing, profits are still rising, and the stock market remains near record highs.  Nevertheless, this decent economic and financial market environment is currently suffering from another “Yield Interruptus” due to a cranky Bond Market. 

A “yield interruptus” is when the bond market periodically gets a little anxious forcing yields higher until it gets feeling better again about things.   Chart 1 demonstrates how frequently and significantly the contemporary Bull market has been subjected to yield-based interruptions.  It overlays the S&P 500 Index (blue line, left scale) since the start of this Bull market on October 12, 2022, with the 10-year bond yield (red line shown on an inverted right-side scale).  Currently the S&P 500 is reacting to the sixth pause or “Interruptus” during this Bull because the bond market is again having some emotional turmoil.  As demonstrated, these pauses vary in length and seriousness.   The first three during this Bull market were short-lived and had relatively mild impacts on the stock market.  However, the only one in 2023 was massive and lengthy — lasting from May to October resulting in the 10-year bond yield rising from about 3.3% to 5% — and causing the S&P 500 Index to decline by about 10%. 

During the first few months of this year, the stock market also endured a yield interruptus when bond yields rose from about 3.8% to 4.7% and the stock market suffered a 5% pullback.    Most recently, the 10-year bond yield bottomed in mid-September and has since risen by about 0.8%.   The current interruptus facing the S&P 500 Index has thus far been mild, only causing it to decline at its worst by about 3% from recent highs.  However, the contemporary bond market emotional meltdown is still in play and could cause a bigger pause yet in this Bull market during the weeks ahead.    What are the primary factors causing bond investors emotional grief and is there any hope this most recent yield interruptus will soon end?