Why stock investors shouldn't worry about 10-year Treasury yield ruining 2024 rally yet

By Vivien Lou Chen

10-year Treasury would need to probably climb to 4.5% before it can undermine valuations in the broader market, says Eric Diton, president and managing director of The Wealth Alliance.

The benchmark 10-year Treasury yield, which rose further above 4% for a second day on Tuesday, appears to be falling short of the levels needed to take the steam out of the 2024 U.S. stock rally. There have been a number of reasons for this, starting with the view that the 10-year Treasury yield's BX:TMUBMUSD10Y trip above 4% may turn out to be short-lived, according to technical strategists and other market participants.

The selloffs in long-term U.S. government debt seen on Monday and Tuesday were likely due to profit-taking, and probably won't derail the overall trend of higher bond prices and lower yields that has prevailed since late July and August, said Eric Diton, president and managing director of The Wealth Alliance in New York state, an investment advisory firm that oversees roughly $1.8 billion.

The 10-year yield would need to climb above 4.5% in some unexpected "curveball" of events to "undermine valuations in the broader market, and I just don't think it's going to get there," Diton said via phone on Tuesday. Moreover, he said, the Federal Reserve will probably keeping cutting interest rates because the current fed-funds rate level of between 4.75% and 5% remains "too restrictive" relative to a CPI inflation rate of 2.5% for August, which means the Fed's main policy rate target should be between 3.5% and 4% right now.

The 10-year yield hasn't closed above 4% on a sustainable basis since July, and there's a second reason why it may struggle to do so going forward. It has to do with technical factors. According to Adam Turnquist, chief technical strategist for LPL Financial in Charlotte, N.C., the yield - which was trading around 4.03% after hitting an intraday high of almost 4.06% - remains below the resistance level of 4.09% and another one near its 200-day moving average of 4.16%. "Until these levels are conquered, upside rallies in yields should be viewed as temporary," Turnquist said this week.

Via email on Tuesday, Turnquist added that equity markets have "shrugged off" the latest rebound in yields because the move has been "underpinned by increased confidence for a soft landing" following the unexpectedly strong September jobs report released last Friday.

However, "it all comes down to rate of change and any sharp moves higher could prove problematic for stocks as they struggle to digest higher rates," the strategist said. "For now, we suspect equity markets will welcome a range-bound fixed-income market, especially when it's accompanied by benign credit spreads."

Read: The bull market is nearing its second birthday. Here's why it will likely continue.

As of Tuesday afternoon in New York, major U.S. stock indexes DJIA SPX COMP were mostly higher, with the Nasdaq Composite up around 1% even as long-term yields climbed.

"The market loves slow, steady growth with low inflation and that's where we are right now" ahead of Thursday's release of the consumer-price index for September, according to Diton of The Wealth Alliance.

"But let's understand this is a bumpy road and economic data is unpredictable month to month," he said. "There's always going to be fits and starts. Nothing goes straight up in stocks or bonds."

-Vivien Lou Chen

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10-08-24 1327ET

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