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Market News Posted by Team Topstep February 25, 2021

Treasury Yields Send Equity Markets Down

Trader on laptop

It looks like traders aren’t quite as confident about the risk of inflation as we thought after Fed Chairman Jerome Powell’s two-day testimony on the economy’s strength. Bond yields rose sharply throughout the week, creating a lot of volatility in the stock market. Treasury yields have historically moved inversely to stocks; so, as yields rise, stocks go lower. That’s exactly what we saw happening on Thursday.

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Chart of the Day

10-year Treasury Note Yield

10-Year Note Yield - 02-25-2021

Chart courtesy of MarketWatch.com

The 10-year note yield rallied above 1.5% and hit its highest level in over a year early Thursday morning. After a two-day testimony from Fed Chairman Jerome Powell, optimism about the strength of the U.S. economy and the future of inflation helped guide the benchmark yield back down towards the end of the day, but it still closed above 1.4%.

Even though the Fed isn’t anticipating any interest rate adjustments in the immediate future, if bond yields rise too fast, it could force the Fed’s hand to act sooner than they would like. This is what spooked stock traders on Thursday.

Historically, high bond yields have not been good for the stock market. The recent short-term spikes could have traders thinking that a top is near in equities. If the sentiment begins to spread, selling pressure could start to snowball and compel the Fed to react.

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