The upcoming SpaceX IPO is grabbing plenty of headlines.
Speculation around its eventual valuation – Elon Musk could become the world’s first trillionaire – has been splashed across headlines. Then there’s the excitement surrounding Anthropic’s planned IPO and potentially OpenAI’s as well. Investors have once again been caught up in a wave of AI hype, and FOMO is in full flight.
But while these IPOs grab investors’ attention, there’s another quieter market that investors need to watch – the bond market.
Because if history is any guide, it’s warning us that there could be trouble ahead for stocks…
Prior to hostilities breaking out in the Middle East, 10-year U.S. Treasury yields were sitting below 4%. But they soon rose sharply…
By May 19, the 10-year Treasury yield was just under 4.7% – a dramatic move in the bond market in such a short time. However, as hopes of a peace plan grew, yields pulled back to the 4.45% to 4.5% range.
That coincided with falls in the oil price, taking some heat out of inflation expectations (and the likelihood that the Federal Reserve might have to raise rates).
But as we’ve seen this past week, hostilities in the Middle East are simmering despite the ceasefire. The most recent skirmish resulted in Iran attacking Kuwait’s international airport, forcing its closure.
And as you can see in the chart below, that has provided some recent support to 10-year U.S. Treasury yields:
10-Year U.S. Treasury Yields
Source: TradingView
Unlike stocks, which are often driven by investor emotions, the bond market tends to be more focused on fundamentals. These include inflation, economic growth, and interest rates, which ultimately determine bond prices.
That’s why I’m watching bond yields so closely right now. If they start rising again, it means that the bond market is increasingly worried about inflation.
That has major ramifications for stocks despite all the current froth in the market.
In addition to rising oil prices, recent data is pointing to a resilient economy. That could put upward pressure on rates.
At a minimum, these numbers make it difficult for the Fed to justify a rate cut anytime soon…
Data this week showed both the manufacturing and services sectors are expanding. The Institute of Supply Management (ISM) Manufacturing data for May showed its strongest expansion in four years. The ISM Services data for May came in at its highest reading in three months, beating expectations. Apart from February’s blowout number, it was its best performance since October 2024.
Data on Tuesday also showed that job openings remain strong – the Job Openings and Labor Turnover Survey (JOLTS) increased the most since November 2024. It’s the type of backdrop that doesn’t point to an economy in need of lower rates.
And that’s why all the current hype is dangerous.
Investors might be captivated by AI, SpaceX, and the promise of the next big thing. But the bond market is sending a different message. Inflation remains elevated, economic growth is holding up, and expectations around interest rates are shifting.
Sure, the hype around these upcoming IPOs could propel the market higher in the short term.
But if Treasury yields start pushing higher again, today’s excitement could quickly give way to a much tougher environment for stocks. Investors may discover they’ve been focusing on the wrong market all along…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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.
