Long-Dated Treasury Yields Reach Multi-Decade Highs as Equities Still Close the Week Up

The American bond market repriced sharply last week. The 10-year Treasury yield briefly reached 5.23 percent, and the 30-year yield reached 5.502 percent, according to market coverage of Friday's session. Equities did not follow the bonds down. The S&P 500 rose 0.51 percent to 7,743.41, the Dow Jones Industrial Average added 478.64 points to 51,828.62 and the Nasdaq Composite closed at 27,068.72, leaving all three higher on the week.

That divergence is what strategists at Bank of America singled out. The Israeli business daily Globes reported their warning that a jump in bond market volatility alongside weakness in financial shares has tended to precede a sharp investor shift out of risk, and that the signal is arriving while investors continue to direct very large sums into equity funds. The bank's point is about sequencing rather than valuation: the fixed-income market is moving first and the equity market has not yet adjusted.

Capital allocators outside the United States are reading the same rate path differently. Analysts told the South China Morning Post that Asia-Pacific property markets remain attractive to fresh capital despite the Federal Reserve's first rate increase in more than three years, with several asset classes still drawing allocations. The dollar has not strengthened along with the higher yields. The dollar index fell to about 101.03 on September 25, with the dollar weaker against the yen after Tokyo and Washington reaffirmed the stance behind July's joint interventions.

A currency that weakens while long-term yields rise typically indicates that investors are demanding more compensation to hold duration rather than seeking a better real return. The Federal Reserve is tightening at the short end under chair Kevin Warsh, and the long end is pricing a supply of government debt that the central bank is no longer absorbing.