Bond Yields Have Normalized

The backup in bond yields since mid-September did not surprise us. But it has surprised lots of other financial pundits, who are warning that this could be bad news for stocks. It could be, especially if the 10-year US Treasury bond yield revisits last year's high of 5.00%. That would probably bring a buying opportunity in the bond and stock markets. We think that bond yields have normalized. The 10-year yield should range between 4.00% and 5.00%, as it did in the years before the Great Financial Crisis. Consider the following related developments:

(1) The yield curve. The US Treasury yield curve steepened to a positive 39bps today, its highest reading since May 2022 (chart). The yield curve has "bear steepened," meaning the 10-year yield has risen faster than the 2-year yield.