The Dow closed up 1,500 points on Wednesday.backed by Donald Trump won a decisive election victory There is also the possibility that Congress will be controlled by Republicans, suggesting strong market optimism.
U.S. Treasury yields rose in tandem with the rise in stock prices, raising concerns among some analysts about market stability and the potential impact on stocks.
The 10-year Treasury yield rose more than 14 basis points to 4.433%, its highest level since July. Similarly, the two-year Treasury yield rose about 7 basis points to 4.274%, its highest level since July 31.
Yields and bond prices move in opposite directions. As yields rise, bond prices fall. This often signals a shift to safer investments and could mean investors are wary of putting money into stocks amid expected economic changes under new leadership. It suggests something.
So what does the rise in Treasury yields indicate?
Goldman Sachs (G.S.-2.34%) Analyst David Kostin released a report on Wednesday detailing his latest outlook for the stock market. In his report, Kostin warned that a significant rise in the 10-year Treasury yield could limit sustained gains in stock prices.
“If the 10-year Treasury yield rises further sharply, the size of potential stock price gains is likely to be limited,” he wrote.
Kostin noted that so far, stocks have managed to absorb the rise in yields, mainly because improving economic data has fueled the rally. But he warned that if bond yields continue to rise, the market’s gains could be narrowed, concentrating gains in certain stocks and limiting overall sector performance. This trend may reflect investor caution, as higher yields make safer investments such as bonds more attractive than stocks.
Interest rate cuts are imminent
Kostin predicted in his report that the Federal Reserve will cut the federal funds rate by 25 basis points on Thursday, bringing it down to its target range of 4.5% to 4.75%. He also predicted another quarter-point rate cut at the Fed’s next meeting on Dec. 18. These rate cuts are likely part of the Fed’s strategy to support economic growth amid changing financial conditions and provide some relief to borrowers as bond yields rise, Kostin said.
