The approach to a 5-handle on the 10-year yield is causing the same agita for equities that it did in the fall of 2023 and throughout 2022. I expect that this will be an ongoing theme for 2025 as the term premium reverts to a more normal range of 100-150 bps.
There are times (when yields are low) when the stock market doesn’t pay too much attention to rates. But when equities are expensive and bonds are positively correlated to stocks, the stock market needs to work harder to compete with the risk-free asset. The Fed model is so back!
Before the rate-induced bear market in 2022, the 10-year Treasury “P/E” (inverse of yield) was 91% higher than the equity P/E-multiple. That left some cushion for stocks to do their own thing. Now the Treasury P/E is 15% lower than stocks, even though Treasuries are the “risk-free” asset.