A broken uptrend in a key government bond yield could be a bad omen for stocks

Yield on benchmark 10-year Treasury and the S&P 500 have been mostly in sync this year, so a breakdown in one suggests the other is likely to follow.

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So much for the V-shaped recovery.

The yield on the benchmark 10-year Treasury note TMUBMUSD10Y, 0.625% just broke below a rising trend line, to suggest the uptrend off the COVID-19 low in early March has ended.

That uptrend in rates was significant for both Main Street and Wall Street. It helped to support the belief that the worst of the effects of the COVID-19 pandemic on the economy was over, with data suggesting the labor market was improving rapidly as all 50 U.S. states phased in measures to reopen their economies. See Economic Reports for recent economic data.Bond yields rise as prices fall.

“The break here suggests that the pattern of higher lows since April has been blocked, and we may see lower yields in sessions ahead combined with a bigger retracement in equities that experienced since the March crash,” Dan Wantrobski, technical analyst at Janney Montgomery Scott, wrote in a note to clients.

Yields had been inching higher coinciding with a V-shaped bounce in the stock market, which helped propel the S&P 500 index SPX, +1.46% as much as 44.5% off its March low to its June 8 recovery high, where it retraced 87% of the COVID-19 selloff, and vaulted the Nasdaq Composite COMP, +1.19% to fresh record closing peaks.

“Keeping an eye on the [10-year yield] trends is important right now because of the positive directional correlation it has with our broader U.S. equity markets,” Wantrobski wrote.


Since the start of 2020, the correlation coefficient between the S&P 500 and the 10-year Treasury yield TMUBMUSD10Y, 0.625% is 0.67, according to a MarketWatch analysis of FactSet data, where a perfect correlation of 1.00 would indicate they were in lockstep, moving in the same direction and to the same degree.

As the number of COVID-19 cases in the U.S. rose to a new daily record Friday, prompting some states to press pause on reopenings, stocks sold off and the 10-year Treasury caught a flight-to-safety bid, to push the 10-year yield down 3.8 basis points (0.038) percentage points to 0.636%, the lowest close since May 14. See Bond Report.

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