Lately, there’s a new player showing up in the financial headlines: Treasury yields.
And if you trade stocks or stock index futures, you may be wondering why you should care.
Why does it matter if Treasury yields go up? And why can rising yields send stocks down?
You don’t need to become an economist or a fixed-income expert to trade stocks. But if you don’t understand the context of how other markets are affecting the market you trade, I think you’re at a disadvantage.
So let’s break this one down.
First, What Exactly Is a Treasury?
When you buy a U.S. Treasury security, you’re essentially lending money to the U.S. government. In return, the government agrees to pay you interest and return your money according to the terms of that security.
Treasuries have historically been considered one of the safest places to lend money because they’re backed by the U.S. government.
That becomes important when yields rise.
A yield is essentially the return an investor can earn for owning that Treasury security. And here’s one bond-market relationship worth remembering:
Bond prices and yields move inversely.
When bond prices go down, yields go up. When bond prices go up, yields go down.
Why Would Higher Yields Hurt Stocks?
This is where it helps to remember something really basic:
Traders and investors have choices.
Stocks and crypto, for example, are generally considered risk assets. Investors take on more risk because they’re looking for potentially greater returns.
Treasuries are different. They’re generally considered a much safer place to put money.
So imagine you’re deciding where to invest your money. If you can suddenly earn a higher return by lending that money to the U.S. government, taking on the additional risk of owning stocks may become a little less attractive.
That can draw money toward Treasuries and away from stocks.
Higher yields can also make borrowing more expensive throughout the economy. Companies may have to pay more to borrow. Consumers may face higher rates on mortgages and other loans. All of that can ultimately weigh on economic activity and corporate profits.
So when Treasury yields start moving sharply higher, stock traders pay attention.
Markets Don’t Trade in Isolation
This is an example of what we call intermarket relationships.
And here’s the important part: those relationships aren’t necessarily fixed.
I’ve had an advantage here because my first Wall Street job was primarily as a fixed-income technical analyst. I worked on bond desks, so I had to understand these markets and their relationships more than the average trader coming straight into stocks or index futures might.
But even with that background, I DON’T look at intermarket relationships as a set of rules where:
This goes up = that MUST go down.
Market conditions change. The relationships that deserve the most attention can change with them.
Before the Iran war began, I found the VIX (CBOE Volatility Index) to be one of the most useful guides to how ES futures and the broad stock market might trade.
Then the war directly affected crude oil prices, and suddenly oil futures became something I needed to watch much more closely.
Now there’s another player in town.
Treasury yields.
What I’m Watching Now
As part of my morning market prep, I always check the financial news. My site of choice is CNBC simply because I was forced to watch it at my first job – it was literally on a TV up in the air, with full volume – so I’m just used to it. 🙂
And now I’m also paying closer attention to the chart of the 10-year Treasury yield. In TradeStation, I plot the symbol $TNX.X as a proxy to quickly see the overall moves.
That gives me three outside markets I’m particularly interested in watching right now:
VIX. Oil futures. The 10-year Treasury yield.
If I come in one morning and VIX is strong, oil is strong and the 10-year yield is climbing, that gives me some context that stocks could face a more difficult day.
Could stocks still rally?
Absolutely.
None of these relationships works 100% of the time. I don’t use them as trading signals, and I wouldn’t suggest that you do either.
They’re guides.
And which guide matters most can change depending on what’s happening in the world and what’s driving markets at that particular moment.
That’s really the lesson I want you to take away from what’s happening with Treasury yields right now.
Don’t look at stock index based charts in incomplete isolation.
Pay attention to what’s happening in the markets around it, because money moves between markets, investors have choices, and those relationships can give you valuable context for what you’re seeing on your own chart.
And right now, Treasury yields have earned a spot on my morning radar.
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