The bull market enters 2025 under threat from a familiar menace over the years: rising interest rates. History has shown that when the 10-year Treasury yield rises to its current levels, equity returns begin to turn negative. After a banner year for stocks, the broader S & P 500 benchmark ended December in the red, in part due to pressure from a jump in yields after the Federal Reserve indicated earlier this month that it may slow down the pace of interest rate cuts in the new year. What’s especially unusual is that interest rates have continued to rise despite the Fed’s cutting cycle, somewhat counterintuitive to investors’ expectations. This month alone, the yield on the benchmark U.S. 10-year Treasury bill has surged nearly 10% and is currently at around 4.573%. Some have attributed this move to a fear that inflation could flare up again, or to increased confidence in the economy’s potential . US10Y YTD mountain US10Y YTD chart Since stocks and bonds are traditionally inversely correlated, bond returns typically increase when equity returns decrease. Since the 2020 yield low, stocks have advanced a cumulative 117% over 1,754 days, according to Evercore ISI. However, stocks slipped 2.1% over the 89 days when the 10-year Treasury yield rose above 4.5%, and shed 3.7% over the 20 days the 10-year Treasury yield traded at above 4.75%, the firm said. “As the progression of a unique era of both a secular bond market rally and a secular stock market rally enters its fifth year of divergence, we are reminded that there are times where rising long end yields can exert medium term pressure on equities even as the economic and earnings backdrop remains favorable,” the investment firm wrote in a note to clients. If history is any indication, with the 10-year Treasury yield persisting above the 4.5% mark in the past few weeks, the stock market could be in a precarious position as the new year arrives. “As 2025 begins, rising long end Bond yields pose the biggest challenge to the Bull market,” Evercore ISI added. “And while there are as many reasons to expect a moderation in yields in coming days (Record shorts, the potential for a geopolitical ‘deal’ in Oil sensitive hotspots, DOGE) as there are for further upward yield pressure, both rising bond market and equity volatility are the base case as 2025 begins.”
The yield on the 10-year Treasury when stock returns disappear