Why is the outlook for U.S. Treasury yields still unclear?

Author: Casey Wagner, Blockworks; Compiler: Wuzhu, Golden Finance

The U.S. Treasury Department released its quarterly refunding statement this week. As Felix mentioned yesterday, this is where officials will announce their debt issuance plans for the next quarter.

The latest statement said that the Treasury will keep the auction size stable "at least for the next few quarters." U.S. Treasury yields fell as a result. On Friday, the 10-year Treasury yield hovered around 4.5%, while the 2-year Treasury yield rose to 4.28%.

Typically,rising yields means falling stock prices, as we saw in 2022, when the 10-year Treasury yield rose above 4% and the S&P 500 fell nearly 20% by the end of the year.

In 2023, yields have been climbing for much of the year, as have U.S. stocks. But it’s worth noting that the S&P 500 doubled its annual gain in the last quarter of 2023, when the 10-year Treasury yield fell 0.5%. 2024 has followed roughly the same pattern.

Okay, that history lesson is over. Now let’s get back to the present. There’s no reason to think that stocks can’t keep up momentum while yields are in the 4% range, but if yields rise too much, recession fears will return and stocks will fall.

The outlook for Treasury yields is uncertain for several reasons.

First, the Fed has paused its rate-cutting cycle for who knows how long. Moreover, inflation remains elusive. Heightened global trade tensions and higher tariffs on U.S. imports, if more broadly implemented, could also weigh on growth, or at least growth expectations.

Then there’s the new leadership at the Treasury. Treasury Secretary Scott Bessent has been vocal about his displeasure with the way former Treasury Secretary Janet Yellen handled things, namely her choice to finance the economy primarily with short-term bills.

Long story short, the stakes are high.