With U.S. stocks hitting record highs, it can be easy to overlook other investment opportunities. A combination of long-dated Treasury yields near multi-decade highs and interest rates that are expected to gradually fall through 2025 is creating an attractive opportunity.
Ten-year Treasury yields remain elevated (4.64%) on concerns that the Trump administration’s spending cuts may not offset planned tax reductions, which could lead to higher fiscal deficits. Investors can lock in high yields and benefit from an increase in the market value of bonds as rates gradually decline. The long-standing positive correlation – where the risk-on trade typically sees stock prices and Treasury yields rise in tandem (as anticipated economic growth drives investors toward equities and away from bonds) – is changing. The stock-price-bond-yield correlation is turning negative.
According to JPM research, recent atypical movements in yields were mainly driven by uncertainty about growth expectations and heightened macroeconomic factors. A further increase in long dated Treasury yields will likely elicit a negative stock market reaction. Yet, it may be the final capitulation moment and a good tactical entry point for Treasuries; especially if the bond market starts anticipating again more Fed rate cuts for 2025 and 2026.
In conclusion, policy-driven volatility and any unexpected economic surprises could make it more challenging for asset allocators this year. In our view, Treasuries are now regaining their historical role as portfolio diversifiers and can act as a hedge for investors if equities experience more volatility episodes in 2025.
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