Trading was less active on Thursday because markets closed in honour of former President of the United States of America Jimmy Carter’s national day of mourning. However, any relief will be temporary, as investors will receive the December jobs report this Friday before the markets open.
It is the kind of economic data released when stocks are already fragile—the first in 2025. On Wednesday, the yield on the 10-year Treasury note rose to its highest level since April 2025, and talk of the yield hitting 5% is rife. If Treasury yields are to rise to new highs, the detriment they pose to the stock market is becoming a hot topic.
What Does the Widening Yield Spreads Signal for the Market?
Long-term yields continue to rise while short-term yields have remained relatively stable, thereby widening the spread of 10-year and 2-year Treasury bonds to the highest level it has reached this year since December 2022.
“The actual concern that Treasury yields will continue to soar is quite a real risk for equities in a world where stocks and bonds are positively correlated.”
Usually, a yield curve is upward-sloping, but we have had an inverted yield curve in recent years. This means investors expect poor economic conditions shortly, which means financial markets will also be unstable.
How Fragile Is the Foundation of the Equity Market?
The benchmark index of US equities, the S&P 500, is down 2.8% since its record high of 6,090.27 on December 6. But here, we see a mere decrease in time spent on the platform—actual data paint a significantly less rosy picture.
On Tuesday, just 51.9 per cent of stocks within the S&P 500 made a new high along with a 200-day moving average — the lowest level considered since November 2013. By Wednesday, this had only slightly improved.
Further, if we scratch the surface, the median S&P 500 stock is down by 12.4%from its high in 2024, while one-quarter of the index is down by 20% or worse.
Small-cap stocks, represented by the Russell 2000 index, have been far worse. The index is now more than 8% off its November record high. Speculative space stocks, especially those targeted by the man-on-the-street—like quantum computing—had large selloffs on Wednesday.
“Such behavior is typical to the equity-market cycles’ later phases,”
How Will the Jobs Report Impact the Market?
That is why the December jobs report could significantly impact the market direction. Improving labour market conditions may increase bond yields and decrease stock prices; otherwise, weaker-than-expected data may provide slight relief.
“If you get a hot number and the unemployment rate stays the same, the 10-year yield is at 4.80%, the S&P 500 is down as much as 2%.”
Analysts on Wall Street have predicted that December announced nonfarm payrolls will pale to 160,000 jobs. However, any number beyond 200,000 would reignite fears that the economy is too rosy for the Federal Reserve to start easing monetary policy.
According to the model, wage growth and unemployment rates will also be crucial determinants. Whenever wages go up, or unemployment rates fall, indicating inflationary trends, there is likely a speculative attack to sell equities because of the expected contraction in the supply of cash.
“Stocks may bounce on weaker data – assuming that it prolongs the rate-cut cycle – but any such bounce will be fleeting.”
What Is Driving the Uncertainty Around Long-End Yields?
The market analysts have been perplexed by Mr Market’s continued climb in long-term Treasury yields, while the Fed has been chopping 100 bp off policy rates since September.
This trend has been said to be ‘very unusual’, and several hypotheses have been floated, with fiscals being one probable cause, weak foreign demand for US debt another probable cause and doubts about the recent Fed rate cuts being the third.
Most importantly, the market is communicating that it is imperative to heed why long rates are going up even when the Fed is paring down.
According to some analysts, the term premium, which captures the extra yield required to hold longer-term bonds, has increased. Some have postulated that the trend may be due to persistently high inflation or expanding U.S. budget deficits, among other factors, as opined by bond-market specialists.
What’s Next for Investors After the Jobs Report?
However, investors don’t get a break immediately: Friday’s jobs report doesn’t tell the whole story. Next week, the market will examine the December inflation rate as another key figure that will inform the Fed’s policy for 2025.
The current world situation leaves both equity and bond markets uncertain, exposing investors to higher risks in their investment decisions. The fluctuations in Treasury yields, resulting from changes in these economic data, will also determine investor actions in the coming weeks.
