US Treasury yields moved lower on Tuesday, providing some relief to equity markets as investors weighed economic data and inflation expectations ahead of the Federal Reserve's policy meeting next week. The benchmark 10-year Treasury yield slipped 2 basis points to 5.114%, while the 30-year bond yield declined by the same margin to 5.45%. The two-year note yield held steady at 4.757%.
Market participants are now looking to a series of economic releases, including September housing starts, pending home sales, and weekly ADP employment figures. Initial jobless claims are due Thursday, followed by the S&P Global Composite PMI Flash on Friday. According to the CME FedWatch Tool, traders assign an 82% probability that the Fed will keep interest rates unchanged at its upcoming meeting.
JPMorgan Sees Yield Surge Losing Momentum
JPMorgan strategists believe the recent spike in the 10-year Treasury yield, which crossed 5% for the first time in two decades in late September and peaked around 5.3%, has gone too far. The bank notes that movements in federal funds futures explain nearly all of the rise in 10-year yields this year. With markets having already adjusted their expectations for short-term rates, much of the upward pressure on longer-term yields could subside.
That would offer some relief to equities, which have been pressured as rising bond yields reduced the relative appeal of stocks and lowered the present value of expected future earnings. JPMorgan's fixed-income team has year-end targets for long-term yields across major markets that are either unchanged or below current levels.
Earnings Strength Provides Support
The rise in Treasury yields has already contributed to a significant decline in stock valuations. During the most intense phase of the selloff, 12-month forward price-to-earnings multiples fell by around three points for both the S&P 500 and the MSCI AC World index, according to Mislav Matejka, JPMorgan's head of global equity strategy. The S&P 500 now trades at 19.1 times forward earnings, down from 21.7 times at the start of the year.
JPMorgan believes stabilizing yields could prevent further multiple compression, particularly as early third-quarter earnings results point to resilient corporate performance. Of the companies that have reported so far, 78% of US firms and 60% of European companies have exceeded consensus earnings-per-share expectations. The proportion of global companies reporting accelerating earnings is also close to record highs.
Lower yields could ease financing pressures on artificial intelligence capital expenditure and reduce strain on consumer balance sheets, potentially broadening market participation beyond mega-cap technology stocks. JPMorgan expects AI-related debt issuance to be unlikely to crowd out government bonds, and it believes hyperscalers' free cash flow could prove stronger than current projections once their results are reported.
Yield Stabilization Could Support Year-End Rally, But Risks Remain
Inflation remains a key consideration for bond markets, especially after recent US price readings came in stronger than expected. However, JPMorgan said inflation expectations remain contained in consumer surveys and market-based measures. Core inflation trends in Europe are similar to levels seen before the Iran war began, while the corresponding trend in the US is only modestly higher, by 0.3%.
Wage growth and wage expectations also remain soft, providing some reassurance that inflationary pressures may not intensify further. France remains another source of concern for European markets, but JPMorgan does not believe investors should position for broader contagion. The strategists pointed to the European Central Bank's available policy tools, stronger bank balance sheets compared with the 2010-12 eurozone debt crisis, less concentrated sovereign bond holdings, and significantly lower credit defaults.
Oil prices remain an important uncertainty for the outlook. A sustained increase could complicate the inflation picture and put renewed pressure on bond yields. Nevertheless, JPMorgan believes the combination of stabilizing yields and resilient earnings could support equities in the coming months. "If bond yields and earnings play out as expected, equities will be able to perform into year-end," the strategists wrote.
This article is for informational purposes only and does not constitute financial advice.
