Will the U.S. economy’s growth machine keep on humming?
Surging bond yields are rattling investors, fueling concerns that stocks may face turbulence ahead, driven by persistent inflation, fewer-than-expected Fed rate cuts, and other potential obstacles. Furthermore, the 10-year U.S. Treasury note yield has spiked: It’s up 111 basis points (bp) since mid-September, shortly before the Fed cut rates for the first time in years.
That said, inflation expectations have accounted for just 33 bp of this rise, meaning the 10-year Treasury’s real yield rose 78 bp over that time (see the chart). In other words, rising real yields have accounted for around 70% of that nominal 111 bp upward movement since mid-September.
Real, Inflation-Adjusted Yield on the 10-Year U.S. Treasury Note
Source: Bloomberg, calculations by Horizon Investments, data as of 1/10/2025.
Real, inflation-adjusted yields are often seen as a proxy for economic growth expectations. The recent rise in yields reflects a strong outlook for future growth and corporate profits, supported by last week’s robust jobs report.
The upshot: Despite the short-term negative impact on stock market valuations, above-trend growth is a healthy driver for rising rates, as it also provides the Fed with the flexibility to cut rates if signs of economic weakness emerge. In that environment, we believe stocks remain attractive investments.
