Stock Market Investors Get an Urgent Warning From the Bond Market. History Says This Will Happen Next.
The U.S. stock market has been rocketing higher despite economic uncertainty created by the Iran war. Since April, the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq Composite (NASDAQINDEX: ^IXIC) have advanced 13% and 19%, respectively, amid a wave of strong financial results.
However, investors got an urgent warning from the bond market last month. The 30-year Treasury yield hit a 19-year high, hinting at potential for steep losses in the stock market. Here are the important details.
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Investors expect the Federal Reserve to raise interest rates in 2026
Entering 2026, investors expected the Federal Reserve to cut its benchmark interest rate by half a percentage point throughout the year. But the odds of lower rates in the near future have essentially dropped to zero since the Iran war began. The conflict has disrupted global oil supplies on an unprecedented scale, driving prices to a multiyear high.
High fuel prices have started to filter into core inflation (which excludes volatile spending categories such as food and energy) by raising transportation and manufacturing costs, especially in energy-intensive industries such as chemicals, lumber, and metals. In April, core PCE inflation (the Fed’s preferred gauge) hit 3.3%, the highest level since late 2023.
The Fed may overlook transitory increases in headline inflation, but officials are prepared to raise interest rates if core inflation stays elevated. And the market now sees that as the most likely outcome. Rather than rate cuts, traders are betting on one quarter-point rate increase later this year, according to CME Group‘s FedWatch tool.
The recent spike in Treasury yields hints at a sharp decline in the stock market
The bond market serves as a barometer for the economy. Prices drop, and yields rise, when investors are worried that inflation will force the Fed to raise interest rates. That happens because investors sell bonds, pushing prices down and yields up, until payouts offer satisfactory compensation for the perceived risk.
Treasury bond yields are particularly important because they represent the risk-free rate against which all other investments are measured. Treasuries are backed by the full faith and credit of the U.S. government, which means there is essentially no chance of a default.
