Bond yields near 5% a potential pitfall for risk assets, JPM says

Investing.com - US Treasury yields potentially climbing to around 5% in the wake of Donald Trump's presidential election victory could impact elevated equity valuations, according to analysts at JPMorgan Chase (NYSE:JPM ).

Following Trump's win last week, the yield on the benchmark 10-year US Treasury note, which typically moves inversely to prices, rose.

Driving the increase were concerns among investors that Republican plans for sweeping tax cuts could grow the already-expending federal deficit, which may in turn cause the government to issue more bonds to pay for the debt.

Meanwhile, worries persisted that Trump's policies could push up inflation and lead the Federal Reserve to slash interest rates at a slower pace than initially anticipated. Broader economic strength and labor market resilience have also been seen as reasons for the Fed to take a less aggressive approach to future borrowing cost reductions.

Late last week, the yield on the 10-year note retreated somewhat from its post-election jump after the Fed slashed interest rates by a quarter-point. Fed Chair Jerome Powell also told reporters that officials were monitoring the run-up in bond rates, adding "things have been moving around, and we'll see where they settle."

The 10-year yield stood at around 4.31% on Friday. Bond markets are due to be shuttered on Monday for the Veterans Day holiday.

In a note to clients, the JPMorgan analysts led by Mislav Matejka said the behaviour of the bond market -- particularly a further uptick in yields -- will likely be a determining factor in the staying power of a post-election surge in equities.

They noted that bond yields spiked following Trump's previous victory in 2016, adding the fiscal deficit at that time was "less than half of the current one." The US national deficit topped $1.8 trillion in the 2024 fiscal year, the third largest on record, Treasury Department data has shown.

"We think that around 5% the impact of bond yields on equity valuations starts to turn, from positive/reflationary one, into the rising concerns over the sustainability of the upcycle and the increasing risk of accidents," they wrote.

Source: Investing.com