Why Bond Yields Matter to Every Trader
The bond market is sending a message that is becoming increasingly difficult to ignore. The US 10-year Treasury yield has climbed to around 5%, pushing through its previous peak and back to levels last seen in 2023.
For those of us trading the S&P 500, gold or EUR/USD, it might be tempting to leave the bond market to the bond specialists. But yields feed directly into the environment these markets trade in, affecting equity valuations, the opportunity cost of holding gold and the relative-rate expectations behind currencies.
The useful part isn't trying to predict where bond yields go next. It's understanding what a move in yields means for the markets we actually trade, and knowing that the answer is different for each one.
Start with the yield
The US 10-year gives us a useful starting point. Yields have been trending higher for much of this year, but the latest acceleration has taken them through the previous peak and back to the highs reached in 2023.
Fiscal concerns, persistent inflation pressures and the outlook for government borrowing have all played a role. For our purposes, however, the more useful question is what other markets are doing in response.
US 10-year Treasury yield daily candle chart
https://www.tradingview.com/x/taEWwzTw/
Past performance is not a reliable indicator of future results
Bond prices and yields move in opposite directions, so rising yields reflect falling prices and a higher return being demanded by the market. But that doesn't give us a universal risk-off signal. The information yields provide depends on which market we're analysing, what is driving the move and, crucially, how price is responding.
Equities: think discount rate
For equities, one of the main transmission mechanisms is the discount rate. A share price reflects the value investors place on a company's future cash flows, and when longer-term interest rates rise, the rate used to discount those future cash flows also increases. All else being equal, that reduces their value today.
The effect can be particularly relevant for growth companies, where a greater proportion of the valuation may depend on earnings expected further into the future. Rising government bond yields also increase the return available from comparatively lower-risk assets, raising the hurdle equities have to clear.
The mistake is turning that relationship into a simple rule that says rising yields must mean falling share prices.
S&P 500 daily candle chart
https://www.tradingview.com/x/7ko6xIER/
Past performance is not a reliable indicator of future results
The current S&P 500 chart shows why. Treasury yields have climbed to multi-year highs, yet the index has remained relatively resilient. Price has pulled back from its recent peak and short-term momentum has softened, but it is only now testing the combination of its previous breakout area and rising 50-day moving average.
If a potential headwind is strengthening but the market refuses to deteriorate significantly, we shouldn't simply assume price must eventually conform to the textbook relationship. Strong economic growth, earnings expectations and risk appetite can all compete with the effect of higher yields.
Instead, we can turn the relationship around and ask how well the equity market is absorbing the rise in yields. Sometimes the response to a headwind tells us more than the headwind itself.
Gold: think real yields
Gold requires a slightly different approach. Unlike government bonds, gold doesn't produce an income stream, so as the return available from interest-bearing assets increases, the opportunity cost of holding a non-yielding asset can rise with it.
Gold daily candle chart
https://www.tradingview.com/x/8tumfUEe/
Past performance is not a reliable indicator of future results
Gold has pulled back from its recent swing high and is now testing its rising 50-day moving average, but that price action cannot simply be attributed to the rise in nominal Treasury yields. For gold, real yields can often provide the more useful comparison because they adjust the return available from bonds for expected inflation.
The distinction matters. If nominal yields are rising largely because inflation expectations are increasing, the change in the inflation-adjusted return available from bonds may be much smaller. A rise in real yields creates a more direct increase in the opportunity cost associated with holding gold.
Even then, we shouldn't expect a perfect relationship. The dollar, geopolitical risk, central-bank demand and wider risk appetite can all influence gold at the same time. Yields provide another layer of context rather than a standalone signal.
Currencies: think relative yields
EUR/USD has also weakened as US yields have pushed higher, with the pair extending its recent decline and returning towards its rising 50-day moving average. It would be tempting to connect those two moves directly, but currencies require another adjustment to our framework.
EUR/USD daily candle chart
https://www.tradingview.com/x/6JnZC02b/
Past performance is not a reliable indicator of future results
EUR/USD represents the relative value of two currencies, so a move in US yields becomes more useful when compared with what is happening to yields and interest-rate expectations in the euro area.
If US yields rise faster than comparable European yields, the relative return available from dollar-denominated assets can become more attractive. If yields on both sides are moving together, the change in the relative-rate picture may be much smaller.
The same principle applies across FX. Rather than asking whether US yields are simply rising or falling, we want to understand how the rate backdrop is changing relative to the other side of the currency pair and then judge how price responds.
One move, three different questions
Bond yields aren't a shortcut for predicting what equities, gold or currencies will do next. Their value comes from helping us understand the environment in which those markets are trading.
For the S&P 500, we can ask how equities are responding to a changing discount-rate backdrop. For gold, we can focus more closely on real yields and the opportunity cost of holding a non-yielding asset. For EUR/USD, the emphasis shifts towards relative yields and how the US rate backdrop compares with Europe.
The recent move in the US 10-year has made those relationships difficult to ignore, but the framework remains useful long after the current move has played out. Bond yields aren't a trading signal. They are another part of the market helping us understand what our trades are up against.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
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