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The conflict in the Middle East is intensifying as the ceasefire between the U.S. and Iran falls apart.
Both sides are exchanging missile attacks while tanker traffic through the Strait of Hormuz is coming to a halt yet again.
The narrow passageway normally sees about 20% of the world’s daily oil consumption transit every day. But just when things looked like they might return to normal, renewed clashes are disrupting the flow of energy products.
Oil prices have quickly pulled a U-turn and jumped from $69 per barrel at the start of July to over $90. That’s having a spillover impact across the markets… and the most consequential shift could be with interest rates.
Bond yields are jumping higher in light of energy-induced inflation and are once again attempting a key breakout.
A major chart level for bond yields is coming back into play, which could become a catalyst for a stock selloff. Here’s why…
A jump in interest rates can cause a spike in volatility across the stock market.
While the Federal Reserve gets attention for driving the short end of the yield curve, longer-term bond yields can cause price swings in the stock market as well.
Rising bond yields can dent stocks in a couple of ways. First, there’s competition for investor capital. When interest rates are on the rise, that means investors can earn a higher rate of return.
That higher rate becomes more attractive when you consider that high-grade bonds typically experience less volatility compared to stocks.
Rising rates also diminish the value of future profits. Investors can quickly rethink how much they should be paying for a stock, especially when valuations become elevated.
The last time we saw a spike in long-term interest rates was in 2022 alongside the bear market in stocks. The 30-year Treasury yield went from 1.69% in December 2021 to 4.40% in October the following year.
During that time, the S&P 500 declined as much as 25%. The carnage was even worse in the tech-heavy Nasdaq, which fell 36%.
So given the potential impact of bond yields on the stock market, there are key chart levels you need to watch.
In fact, a major level on the 30-year Treasury yield is being tested once again. And if a breakout holds, it could become a catalyst for more downside in stocks.
Interest rates have been tracking the price of oil very closely, which makes sense given the impact on the inflation outlook.
But the most recent rally in oil is driving bond yields back toward a key level. Here’s a chart of the 30-year Treasury yield below.
It’s forming a chart pattern called an ascending triangle, which is shown with the dashed lines. As the 30-year yield keeps testing the 5.0% level, the pullbacks are growing smaller, as shown with the lower dashed line.
The 30-year yield attempted to move above 5% back in late May, but the breakout failed.
Now the 30-year is making another run, so investors need to be on watch for a sustained move above 5.0%.
That could mark the beginning of another period of quickly rising bond yields… and spell trouble for the stock market.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. There’s a pattern tied to the Federal Reserve that hits the market every 90 days. Over the last five years, it has come around 23 times. In 22 of them, I’ve handed my members multiple winning trades. That’s a 96% win rate.
The next opportunity is due to hit on September 16. You can watch my recent presentation to learn how to get positioned today.
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
