The yield of 10-year US government bonds has reached a new high, exceeding the mark of 4.7%. This development is significantly impacting the stock markets, particularly smaller companies, whose valuations are highly sensitive to rising financing costs. What was once hailed as a sign of a robust economy is now increasingly viewed as a risk for growth and stability.
After President Donald Trump’s election, the market mood was characterized by euphoria. The promises of tax cuts, deregulation, and protectionist measures sparked hopes of an economic renaissance. Stock prices and bond yields rose in parallel, supported by the prospect of higher corporate profits and sustained growth.
However, as soon as the initial optimism wore off, a sense of disillusionment set in. While some growth impulses appear realistic, Trump’s hardline immigration policies and permanent tariffs threaten to dampen economic dynamism. At the same time, concerns are growing that the US economy is already reaching its capacity limits. Excessive growth carries the risk of inflation and higher interest rates – a scenario that the rising bond yields reflect.
The bond markets are sending a clear message: the US is near the limits of sustainable growth. As soon as the economy overheats, the pressure on the Federal Reserve to raise interest rates further to curb inflation will increase. Currently, the term market still expects a possible rate cut in 2025, but the probability of multiple cuts has significantly decreased. Moreover, an increasing number of analysts believe that interest rates could remain at a high level for a longer period.
The impact on the stock markets is noticeable. Rising yields without corresponding growth lead to higher financing costs for companies, which directly affect their margins. Smaller and mid-sized companies, which are more dependent on external capital, are facing challenges.
An additional burden could come from the Trump administration itself. If the Treasury Department were to shift its debt issuance to long-term bonds, as recently hinted, this would increase the supply on the market and drive yields even higher – independently of the actual deficit development.
The rising bond yields are sending a clear signal: the US economy is near its growth limits. While bonds are gaining in attractiveness as a defensive alternative, the stock markets are facing a challenging period. Investors should prepare to adjust their portfolios and get ready for a demanding year in 2025. The balance between risk and return will be crucial in the coming months.