Following Donald Trump's presidential election win, market enthusiasm has driven stocks and crypto assets to record highs. However, JPMorgan advises wealth advisors and RIAs to watch the Treasury-bond market for any indications of rally fatigue.
JPMorgan’s equity strategy team notes that a 5% yield on the 10-year Treasury bond could mark a critical inflection point for US equities, as the bond is currently trading at around 4.3%.
"At approximately 5%, we believe bond yields may shift from being a positive, reflationary force to raising concerns about the sustainability of the equity upcycle and the increased risk of market disruptions," the team wrote on Monday. This analysis comes from Mislav Matejka, JPMorgan’s head of global equity strategy.
Following Trump's win, government-bond yields surged as investors anticipated that his administration’s stance on immigration and protectionist trade policies would drive inflation, pushing the Federal Reserve to raise rates. The 10-year Treasury note jumped by 21 basis points to reach 4.47% on Wednesday, the day after the election.
Adding further pressure on bond yields is the potential reaction from “bond vigilantes” who may respond to rising federal deficits by selling Treasuries.
"If the Trump administration pursues aggressive fiscal policies with increased spending and tax cuts that widen deficits, bond vigilantes may push yields to levels that could challenge economic stability," said Ed Yardeni, president of Yardeni Research, in a DealBook newsletter.
JPMorgan suggests that if yields stay below 5%, the market’s direction in the short to medium term will depend on Trump’s policy priorities.
If immigration restrictions and higher tariffs are prioritized, JPMorgan expects stocks may face challenges. However, the firm notes that a focus on tax cuts could provide a positive boost for equities.
