The U.S. Department of the Treasury Building in Washington in July. The U.S. 30-year Treasury bond is getting a lot of attention.Daniel Heuer/Reuters
Bond yields are rising again, raising questions about whether they could trip up the equity bull market. This is investment reporter David Berman, filling in for Scott Barlow, and today we take a look at what the all-important bond market is trying to tell us. Plus, get ready for quarterly results from this year’s hot sector, Canadian banks. And in diversions, we look at how the U.S. President is... driving up electric vehicle sales.
Fixed Income
Bond yields are rising again: ‘We aren’t pushing the panic button’
Bond yields are stirring again, in some cases rising to multiyear highs as investors take a more concerned view of inflation, rising energy prices, bloated government deficits and the massive debt-binge that is underpinning new data centres.
What could go wrong?
The U.S. 30-year Treasury bond is getting much of the attention. The yield rose above 5.33 per cent on Tuesday, marking its highest intraday level since 2007.
The 10-year bond is also having a moment. The yield has been flirting with levels above 4.7 per cent over the past few weeks, as bond prices decline. That is the highest yield so far this year and it is bringing into focus the 5 per cent mark that panicked investors in 2023 and weighed on stocks.
There was some relief on Wednesday, after the U.S. Treasury Department announced that it would double the size of debt repurchases, fueling a bond rally that sent yields down, at least for the time being.
This is a global thing, though, affecting bond yields worldwide, including Canada. And some observers are wondering if the so-called bond vigilantes – the term coined by Ed Yardeni in the 1980s to describe investors who respond to rising fiscal pressures by ditching bonds – are growing restless.
One such observer? Mr. Yardeni himself.
The president and chief investment strategist at Yardeni Research said in a note this week: “We’ve often said that we will worry about the U.S. government debt problem when the Bond Vigilantes worry about it. In recent months, they seem to be stirring around the world,” Mr. Yardeni, said in a note this week.
He added: “We aren’t pushing the panic button. However, we are closely monitoring whether the Bond Vigilantes might do so.”
For now, he’s sticking with his view that the 10-year bond won’t do anything too crazy, partly because he thinks rising yields are reflecting U.S. economic strength. He expects the yield will stay below the 5 per cent threshold without causing damage to the economy or corporate earnings through soaring borrowing costs.
Still, parts of the stock market are on edge.
The tech-heavy Nasdaq Composite Index slumped 1.3 per cent on Tuesday – a sharp decline that may have been driven by tech sensitivity to rising bond yields and tighter monetary policy.
It doesn’t help that investors also have to weigh new leadership at the U.S. Federal Reserve.
Kevin Warsh as chair has the support of U.S. President Donald Trump, who had been clamouring for rate cuts last year.
Yet Mr. Warsh has inherited an inflation rate that remains well above the central bank’s 2 per cent target, adding uncertainty to monetary policy. What’s more, the Fed’s recent tilt toward providing less forward guidance on future policy decisions means that investors may have significantly less information to chew on.
“The important debate right now is not whether the Fed cuts 25 basis points or hikes 50 basis points,” Vishal Khanduja, portfolio manager at Morgan Stanley, said in a note last week. “It’s whether we are entering a different monetary policy regime altogether.”
Oh boy.
Still, the prevailing hope is that the current concern about rising bond yields will pass as upbeat economic and corporate fundamentals soothe rattled nerves.
“While equity markets have dropped back a little at the start of this week, strong earnings growth and continued optimism around the AI boom provide a substantial buffer,” Jonas Goltermann, chief markets economist at Capital Economics, said in a note this week.
“It would probably take a further pick up in bond market volatility, towards the levels seen in 2022 and 2023, to put a major dent in equity markets,” Mr. Goltermann said.
The Big Six will report their quarterly financial results next week.Aaron Vincent Elkaim/The Canadian Press
Canadian banks
Lender mania: Will Big Bank earnings shed light on soaring valuations?
One the biggest head-scratchers in the Canadian equity landscape this year is the strong performance of Big Bank stocks, which has stretched valuations.
Darko Mihelic, an analyst at RBC Dominion Securities, added some perspective to the rally: On average, his estimates for 2026 earnings per share (EPS) have risen by 13 per cent, year over year – yet the average stock price is up 65 over the same period.
“This is the largest average stock price return relative to average annual core EPS estimate revision in more than a decade for the group,” he said in a note.
Here’s some good news if you find this baffling, though. The Big Six will report their quarterly financial results next week, with Bank of Montreal and Bank of Nova Scotia kicking things off on Aug. 25. Perhaps the results will justify valuations.
Diversions
The war in Iran is good for one thing: EV sales
Add one more example of how U.S. President Donald Trump’s erratic policies are backfiring. Think he had it in for electric vehicles? Think again: His war in Iran is raising energy prices, and also spurring EV sales: 29 per cent of all new cars sold worldwide this year are expected to be EVs, according to the International Energy Agency.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
What’s up next
Read this week’s earnings and economic calendar here