Key takeaways
- Bruce Campbell says 10-year yields have reached levels not seen since 2007, creating another valuation headwind for U.S. equities.
- Market pricing cited by Campbell implied a 93% probability of a 25-basis-point Federal Reserve rate increase ahead of the latest meeting.
- Energy remains relatively strong as oil prices rise, while financials and utilities are weakening and technology remains in a softer momentum position.
- U.S. consumer staples are beginning to improve, giving investors another signal to watch for evidence of a broader shift toward defensive positioning.
Bond yields are back at the centre of the market conversation, and the implications extend well beyond the fixed-income market.
In the latest Markets in Motion, StoneCastle Investment Management portfolio manager Bruce Campbell examines the rise in 10-year yields, what the bond market could be signalling about Federal Reserve policy and how higher rates are reshaping sector leadership.
Campbell says the 10-year yield has reached levels not seen since 2007. Higher yields matter for stocks because they influence valuations, borrowing costs and the relative attractiveness of equities compared with fixed-income assets.
Inflation is one of the forces behind the move.
This article is being disseminated on behalf of StoneCastle Investment Management, a third-party issuer, and is intended for informational purposes only.
Campbell also highlights the spread between the two-year yield and the Fed funds rate. He says the two-year has historically tended to lead Fed policy and points to a roughly one-percentage-point gap between the two rates.
The last comparable gap highlighted in his analysis occurred in 2022, around the beginning of the Fed’s previous rate-hiking cycle.
Ahead of the latest Federal Reserve meeting, Campbell says market pricing implied a 93% probability of a 25-basis-point hike.
Sector leadership changes as rates climb
The rate environment is producing a mixed picture across U.S. equities.
Energy remains one of the stronger areas as oil prices continue to rise. Financials, however, have started to turn lower, while utilities are also weakening as higher borrowing costs weigh on the heavily indebted sector.
Technology is moving sideways within the weakening quadrant of Campbell’s relative rotation analysis, making its next move another area to monitor.
Consumer staples could offer a clue about broader investor risk appetite.
Unlike in Canada, U.S. staples have started to turn higher. Because investors often favour defensive sectors when risk appetite deteriorates, Campbell says the move is worth watching for signs of a more pronounced shift in market positioning.
A difficult seasonal window
The rise in yields also arrives during a historically choppy period for equities.
September has traditionally produced greater volatility, and Campbell notes that the current combination of higher rates and seasonal weakness makes the recent market turbulence less surprising.
The U.S. midterm election cycle provides another historical backdrop, although Campbell’s analysis suggests September’s seasonal volatility has tended to be less pronounced in U.S. equities than in Toronto.
For investors, the combination of Treasury yields, Fed policy and changing sector momentum could make relative strength increasingly important as the market moves through the remainder of September.
Watch the full episode above for Bruce Campbell’s analysis of Treasury yields, Federal Reserve policy and U.S. sector rotation.