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Weekly Market Update

Rising Yields Signal Economic Resilience

Rising 10-year yields, nearing 4.5%, signal economic resilience. Cyclical stocks outperformed defensive ones, reflecting growth optimism. Despite higher financing costs, stable inflation and tight bond spreads indicate confidence in a healthy US economy.

5 min read
Head of North American Investment Strategy & Research
Senior Investment Strategist
Investment Strategy & Research Specialist
Fixed Income Portfolio Specialist

Rising bond yields can be an economic headwind, but rising yields can also signal underlying economic resilience. Since September, the 10-year yield has steadily increased, reaching close to 4.5% before rolling over a bit more recently. To get a deeper sense how risk assets are responding to the recent change in yields, the chart below shows the relative relationship of cyclical vs defensive equities, and how they are responding to the higher yields of the last few months.

The chart highlights a clear uptrend in both the 10-year yield and US cyclical sector relative performance since September. Cyclical sectors are particularly sensitive to economic growth, and their strong performance underscores confidence in the broader US economy, despite the headwinds of higher yields.

The current environment of rising yields is characterized by a balancing act between headwinds and opportunities. While businesses and consumers face increased financing costs, the broader economic picture remains strong, supported by a healthy consumer and stable inflation expectations. Corporate bond spreads also rhyme with this, as they remain at tight levels and reflect the continued optimism of economic growth. As the markets navigate these dynamics, it becomes clear that higher yields, when driven by growth rather than inflation, reflect expectations for a healthy economy.

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