Bank of America strategists have recently stated that as long as the 10-year US Treasury yield remains below the historical high of 5%, the prospect of a sharp decline in the US stock market can be avoided.
Michael Hartnett of Bank of America is one of the most pessimistic strategists on Wall Street. In a report on Thursday, Hartnett wrote that the strengthening of the US dollar, rising US bond yields, rising oil prices above $100 per barrel, and "clear signs" of rising unemployment caused by the credit squeeze on small businesses will push the S&P 500 index below the 4200 level.
In early October, the 10-year US Treasury yield surged to its highest level in 16 years, and the S&P 500 index briefly approached a key support level of 4200 points.
For 2024, Hartnett stated that the "best prediction" is that the economic recession and the Federal Reserve's interest rate cuts will drive the rise of US bonds and gold, as well as a comprehensive rebound in US stocks. Although the S&P 500 index has risen by 13% this year, this strategist remains pessimistic about the overall outlook for 2023.
This strategist said that as funds flow into money market funds on a large scale, investors need to see the economy shrink and interest rate cuts, and the sentiment of being bullish will be completely ignited.
In addition, the report also shows that as of the week ending October 11th, there was a $3 billion outflow of funds from the US stock market, with approximately $8.2 billion leaving global equity funds. Bank of America's Bull Bear Index fell to 2.2, its lowest level since April this year.
Deutsche Bank strategist Jim Reid also warned, "Given the continuous rise in long-term US Treasury yields, I find it difficult to imagine that this will not increase the risk of unexpected events in the financial system. Therefore, this is a dangerous period
The 10-year US Treasury yield, known as the "anchor of global asset pricing," is the benchmark for all other investments. As the yield of US Treasury bonds increases, it will affect a wider market, from car loans to credit cards, from public borrowing to financing costs for corporate acquisitions, all of which will be affected.
Ian Lyngen, head of interest rate strategy at BMO Capital Markets, warned that if the 10-year US Treasury yield hits 5%, it could be a "turning point" that could trigger widespread selling of risky assets such as stocks. This is the largest unknown in the financial market
Furthermore, it is worth noting that if the 10-year US Treasury yield continues to climb to its highest level since 2007, these increases may replace the further increase in the federal funds rate.
Dallas Fed President Lorie Logan said on Monday, "If long-term interest rates remain high due to an increase in term premiums, it may reduce the need to raise the federal funds rate." Logan has voting rights in the Federal Open Market Committee (FOMC). Logan's words are clearly different from his previous stance, as he has been advocating for further interest rate hikes this year.