{"id":254982,"date":"2026-08-31T13:15:00","date_gmt":"2026-08-31T17:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=254982"},"modified":"2026-09-01T04:34:31","modified_gmt":"2026-09-01T08:34:31","slug":"bonds-are-driving-the-market-or-are-they","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/ibkr-market-insights\/bonds-are-driving-the-market-or-are-they\/","title":{"rendered":"Bonds are Driving the Market. Or Are They?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/ibkr-market-insights\/auto-draft-9\/\">As we noted at the time<\/a>, Friday saw exceptional volatility at the short end of the yield curve.&nbsp;&nbsp; Even as I was writing that day\u2019s missive, 2-year Treasury yields had risen by 10 basis points, up from 7 when I started writing.&nbsp; They finished the day over 11 basis points higher.&nbsp; This was the largest move in that tenor since a 13-basis-point jump on June 17<sup>th<\/sup>.&nbsp; Do you care to guess who triggered that prior move?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Indeed, when Kevin Warsh talks, people listen.<a href=\"#_edn1\" id=\"_ednref1\">[i]<\/a>&nbsp;&nbsp; The problem is that short-term fixed-income traders generally don\u2019t like what they hear.&nbsp; Although his July 29<sup>th<\/sup> press conference was greeted calmly, with 2-year rates dropping by a single basis point, his first FOMC press conference as Fed Chair was greeted with a similar reassessment of the likelihood of rate hikes.&nbsp; If hikes are more likely, then short-term rates rise to reflect that.&nbsp; <a href=\"https:\/\/www.cmegroup.com\/markets\/interest-rates\/cme-fedwatch-tool.html\">CME FedWatch<\/a> now shows a 66% probability for a September hike, up from 36% on Thursday, while <a href=\"https:\/\/www.interactivebrokers.com\/predictionmarkets\/app\/#\/853722976\/product-details\/contracts?exchange=KALSHI\">IBKR Prediction Markets<\/a> show a more sanguine 56% \u201cYes\u201d, which is up from 31% prior to Jackson Hole.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The rise in short-term rates is by no means Warsh\u2019s fault.&nbsp; Rates began rising in March, coinciding with the start of hostilities in the Persian Gulf, and have marched steadily higher since.&nbsp; Bear in mind, too, that Jerome Powell\u2019s last press conference as Chair on April 17<sup>th<\/sup> was followed by its own 12-basis point rise in 2-year rates.&nbsp; Over the past few months, it has become clear that the primary concern for the FOMC has shifted from employment to inflation.&nbsp; This is why long-term rates have been pushing higher as well.&nbsp; While the long end of the curve stayed relatively stable on Friday, today we see 4-5-basis-point bumps in 10- through 30-year bonds.&nbsp; Higher oil prices, resulting from renewed hostilities in the Gulf overnight, are a likely culprit.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Stocks seem generally able to shrug off the prospect of higher rates, even if that path seems glaringly obvious.&nbsp; The following statistics put this into perspective.&nbsp; On February 27<sup>th<\/sup>, the last day before missiles began flying around the Persian Gulf region, 2-year notes yielded 3.38% and 10-years yielded 3.94%.&nbsp; Those levels are currently 4.34% and 4.76%, respectively \u2013 both nearly a full percentage point higher over 6 months (96 and 82 basis points each, respectively, to be more precise).&nbsp; Over that same period, the S&amp;P 500 (SPX) and Nasdaq 100 (NDX) are roughly 11.5% and 17.6% higher, respectively.&nbsp; It is quite clear that equity investors are paying far more attention to solid corporate earnings than to the higher cost of money.&nbsp; Quite frankly, most companies\u2019 return on investment far outpaces the return on government debt.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At some point, higher rates can, and should, weigh on equity valuations.&nbsp; Remember, in theory, a stock\u2019s current value is determined by the present value of its future earnings and\/or cash flows, and the higher the long-term rates, the lower that value.&nbsp; But if those earnings and\/or cash flows are rising faster than interest rates, we can make a case for valuations improving nonetheless.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Yet there would seem to be a level where rates will matter.&nbsp; Might it be something mechanical, like a 10-year yield above 5%?&nbsp; We have flirted with that level only twice in 20 years, most recently in October 2023, and before that in June 2007.&nbsp; (In the 1990s, 10-year yields routinely exceeded 5%).&nbsp; Might it be something more subtle, a point where cash-hungry AI builders decide that their cost of funds become uneconomic?&nbsp; Perhaps, but if investments are being based on limitless potential, a few basis points here and there shouldn\u2019t matter, should they?&nbsp; Until we resolve those questions, stocks are likely to remain on a divergent path from bonds \u2013 until one day, they\u2019re not.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ednref1\" id=\"_edn1\">[i]<\/a> I\u2019m reminded here of the old commercials with the tagline, \u201c<a href=\"https:\/\/youtu.be\/tez-E31kohI?si=6Gcdt73pqpQSKE46\">When E.F. Hutton talks<\/a>, <a href=\"https:\/\/youtu.be\/5_XHTKT01nE?si=5ZSwIQfuXLLc_G7E\">people listen<\/a>.\u201d&nbsp; That brokerage firm is long gone, absorbed into the late-\u201980s-to-early-\u201890s miasma that was Shearson Lehman Hutton American Express, or whatever they called themselves that month (I think I have my old business cards with various permutations of the firm\u2019s name somewhere), but their commercials made a lasting impression.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>As we noted at the time, Friday saw exceptional volatility at the short end of the yield curve.\u00a0\u00a0 Even as I was writing that day\u2019s missive, 2-year Treasury yields had risen by 10 basis points, up from 7 when I started writing.\u00a0 They finished the day over 11 basis points higher.\u00a0 This was the largest move in that tenor since a 13-basis-point jump on June 17th.\u00a0 Do you care to guess who triggered that prior move?<\/p>\n","protected":false},"author":4,"featured_media":192184,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[15,14700,6,8,9,26,3],"tags":[],"contributors-categories":[13576],"class_list":["post-254982","post","type-post","status-publish","format-standard","has-post-thumbnail","category-fixed-income","category-ibkr-market-insights","category-north-america","category-region","category-securities","category-text-articles","category-traders-insight","contributors-categories-interactive-brokers"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Bonds are Driving the Market. 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