US Treasury yields edged lower on Tuesday as investors assessed incoming economic data and the inflation outlook ahead of the Federal Reserve’s interest rate decision next week.
The benchmark 10-year Treasury yield fell 2 basis points to 5.114%, while the 30-year Treasury bond yield declined by the same amount to 5.45%.
The two-year Treasury note yield was broadly unchanged at 4.757%.
One basis point equals 0.01 percentage point. Bond yields and prices move in opposite directions.
Investors were awaiting September housing starts and pending home sales figures, alongside weekly ADP employment data.
Initial jobless claims are due on Thursday, followed by the S&P Global Composite PMI Flash on Friday.
Traders are pricing in an 82% probability that the Federal Reserve will leave interest rates unchanged, according to the CME FedWatch Tool.
JPMorgan sees bond yield surge losing momentum
JPMorgan believes the recent surge in the 10-year Treasury yield, which crossed 5% for the first time in two decades in late September and peaked at around 5.3%, has gone too far.
The bank noted that movements in federal funds futures explain almost all of the rise in 10-year yields this year.
With markets having already adjusted their expectations for short-term interest rates, the strategists believe much of the upward pressure on longer-term yields could subside.
That would offer some relief to equities, which have faced pressure as rising bond yields reduced the relative appeal of stocks and lowered the present value of expected future earnings.
The recent rise in long-term bond yields has weighed on equity valuations, but JPMorgan strategists led by Mislav Matejka believe the pressure could ease if global bond markets stabilise.
The strategists said they argued two weeks ago that the rise in yields “was showing signs of getting stretched, and that bonds were entering oversold territory.”
The bank’s fixed-income team has year-end targets for long-term yields across major markets that are either unchanged or below current levels.
Earnings strength offers support to equities
The rise in Treasury yields has already contributed to a significant decline in stock valuations.
During the most intense phase of the selloff, 12-month forward price-to-earnings multiples fell by around three points for both the S&P 500 and the MSCI AC World index, Matejka wrote in a recent note.
The S&P 500 now trades at 19.1 times forward earnings, down from 21.7 times at the beginning of the year.
JPMorgan believes stabilising yields could prevent further multiple compression, particularly as early third-quarter earnings results point to resilient corporate performance.
“The multiple compression might not need to continue,” the strategists said.
Of the companies that have reported so far, 78% of US firms and 60% of European companies have exceeded consensus earnings-per-share expectations.
The proportion of global companies reporting accelerating earnings is also close to record highs, according to the strategists.
Lower yields could ease financing pressures on artificial intelligence capital expenditure and reduce strain on consumer balance sheets.
That could help broaden market participation beyond mega-cap technology stocks.
JPMorgan expects AI-related debt issuance to be unlikely to crowd out government bonds.
It also believes hyperscalers’ free cash flow could prove stronger than current projections once their results are reported.
Yield stabilisation could support equity rally into year-end, but risks remain
Inflation remains an important consideration for bond markets, particularly after recent US price readings came in stronger than expected.
However, JPMorgan said inflation expectations remain contained in consumer surveys and market-based measures.
Core inflation trends in Europe are similar to levels seen before the Iran war began, while the corresponding trend in the US is only modestly higher, by 0.3%, the bank said.
Wage growth and wage expectations also remain soft, providing some reassurance that inflationary pressures may not intensify further.
France remains another source of concern for European markets.
However, JPMorgan does not believe investors should position for a broader contagion.
The strategists pointed to the European Central Bank’s available policy tools, stronger bank balance sheets compared with the 2010-12 eurozone debt crisis, less concentrated sovereign bond holdings and significantly lower credit defaults.
Oil prices remain an important uncertainty for the outlook.
A sustained increase could complicate the inflation picture and put renewed pressure on bond yields.
Nevertheless, JPMorgan believes the combination of stabilising yields and resilient earnings could support equities in the coming months.
“If bond yields and earnings play out as expected, equities will be able to perform into year-end,” the strategists wrote.
This post US Treasury yields ease: JPMorgan sees year-end stock gains if yields remain stable may be modified as updates unfold
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