Think stocks are all that matters? Not anymore. Here's why bonds — and their yields — are now driving the entire market narrative in 2025.
New, old ways. I have lost count of how many recent morning notes I have penned with bonds as the central character. I am sure that most of you would rather hear about the stocks—don’t worry, I won’t take it personally. Honestly, stocks are more fun to talk about. I mean, who doesn’t want to talk about NVIDIA’s Blackwell chips in PCs or about Meta’s relaxing of its fact-checking efforts? Believe me, I am sure that I can even come up with some salacious news items on some company or other. Look, if your goal is to make money, then you need to pay attention here, because your performance in the equity markets will be at the mercy of bond markets going forward.
When I was just a neophyte on Wall Street, bond traders ruled. They were the ones glued to the tape, carefully tracking economic releases and global news events. One of the most highly coveted tools was the Econoday calendar which listed all of the economic releases for the year… THE YEAR. And yeah, it was made of paper. Having one of those on your desk was a status symbol, second only to the Monroe Bond Trader calculator (which still graces my desk, though it doesn’t work anymore). My regular followers probably recall that I was birthed on Wall Street as a Treasury trader.
It suited me well as a math guy because the fixed income markets are highly constrained to… well, mostly math. Things don’t just happen in the bond markets. There is more than likely a reason for most market moves in bonds. Sure, there are stories that flash across the tape that cause wild reactions, but the markets are so liquid, the stories are quickly dispelled as rumor or fact and reflected in prices… er, yields. There is supply and demand, the Tweedle Dee and Tweedle Dum of all economics. There are currencies, repo markets, the Fed, money supply, balances of trade, a highly liquid futures market, duration (which is not the same as maturity 😉), and so on. All of these are grounded in mathematics. Very little room for emotions. I am a quant, so fitting all that stuff into neat statistical models was and still is relatively straightforward.
My life as a young Wall Streeter was very enjoyable… until it came to cocktail parties. When they would hear that I worked on Wall Street, people would always ask me about stocks. For some reason, nobody cared about the shape of the yield curve. I would try in earnest to convey the excitement of basis trading between cash and futures, or how cool stripping and reconstituting notes were, but I would ultimately find myself talking about the Fab-3 of the day, which consisted of Oracle, Microsoft, and Cisco Systems. Any worthwhile information on those companies would come from the morning, PAPER edition of the Wall Street Journal or from the awesome folks on CNBC’s Squawk Box, which still exists today 😉. Oh, and there was a relatively clear inverse relationship between stocks and bonds. The watering holes of Wall Street were packed with bond traders, brokers, and salespeople. There were no equity traders present. We ruled Wall Street!
Obviously, that chapter ended, and stocks became all the rage, and the primary reason was not that stocks were fun to talk about. The primary reason for can be found on the following chart. Check it out then follow to the finish line.
Ignore the yields but please do note the downward trend from 1989 through 2020. Do you get the picture yet? What was the only thing exciting about bonds in 1970s and peaked in the early 1980s was of course, the great yields. People could buy Treasuries… risk-free Treasuries with appealing yields. What’s more, investors could buy corporate bonds, municipal bonds, and agency bonds, which offered even higher yields based on the level of risk and rating. There were all sorts of interesting mortgage-backed securities as well, though they are a different animal. I am not going to put a chart of the stock market through that period. You probably remember that it had its ups and downs, but for the most part, if you were patient and LONG TERM FOCUSED, you made a lot of money… and all those great stories. 😊
But guess what folks? If you haven't already figured it out, we are already in a new chapter. See if you can figure out when the chapter changed by looking at the chart above. Still don’t like bonds? That’s ok, but you had better pay attention to them, because they are now elevated back to their leadership roles. For many years we would talk about utility, real estate, and high-dividend industrial stocks as being interest rate sensitive. My friends, in case you haven't noticed ALL STOCKS ARE NOW INTEREST RATE SENSITIVE. If you don’t believe me, just look at the past few trading sessions. Yields rise, stocks go down. Now, the exact, mathematical relationship between the two does exist (present value calculation), but it is debatable, especially with our favorite growth stocks. Regardless, one cannot argue that rising yields put pressure on equities. Here is the good news. Treasury yields are very much tied to economic performance and BOND TRADERS’s economic forecasts. Those forecasts are based on real numbers from expected monetary and fiscal policy. They don’t always get it right, which is why there are constant adjustments, but don’t kid yourself, yield movements are all based on… well, it is safe to say that there are certainly not many interesting snappy stories. Would you believe that these days, I am now popular at cocktail parties? I come well equipped to tell stories about this stock or that one. However, most people these days seem to only want to talk about… wait for it… wait for it… BONDS.
YESTERDAY’S MARKETS
Stocks closed in the red yesterday, losing steam throughout the session, largely due to bullish and inflationary economic numbers. Jobs remain aplenty according to the latest JOLTS numbers. Inflationary pressure remains for suppliers, says the latest ISM Services PMI—not a good development for consumer inflation.
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