U.S. Index Futures Losing Steam: How Is This Connected to the Treasury Yields

January 5, 2023: The start of 2024 saw the U.S. Index Futures losing value, with the likes of the Nasdaq Composite losing 1.18% and the S&P 500 losing 0.8%, as of January 3, 2024, day-on-day. Even the Dow Jones Industrial Average Index lost over 280 points in a single day — all while the 10-year Treasury Yields were on the mend — up 12 basis points, day-on-day.

“Whenever Treasury Yields, long-term and mid-term, increase, a trend surfaces where people start moving away from stocks and going deeper into bonds,” mentions Rahul Nambiampurath, Trading.biz analyst. Simply put, a rise in the 10-year and 2-year Treasury yields hints caution among investors, who are on the lookout for safer, long-term investment options.

Broader Impact of Higher Yields

Rahul mentions that a rise in yields indicates that investors are increasingly selling off existing bonds, pushing funds elsewhere. Simply put, they expect higher interest rates from the new Treasury Bonds, both long-term and mid-term, and are waiting to invest.

Here are some of the focus pointers that align with yield increases:

Inflation expectations

Expectations surrounding fed-led rate hikes

Financial sector stocks to turn bullish due to wider interest margins

Portfolio balancing theme to prefer value and growth stocks along with long-term bonds

As of January 4, 2023, the US10Y chart is trading at 3.967%, up almost 12 basis points since the start of the year. And while the rates are still far off from the October 2023 high of 5.02%, the RSI’s higher highs hint at a bullish momentum. The analyst expects the 2024 US10Y levels to hold closer to 4.774% per our expectations concerning inflation and moderate economic growth.

Why Might the Indices Suffer? The Logic Behind

On the other hand, the decline in U.S. Index Futures when Treasury Yields increase aligns with the expectations of higher interest. This means the Federal Reserve’s promise of a dovish stance in 2024 might not hold.

While the sectoral stock market themes, like the energy index showing robustness despite the broader index losing value, are expected to hold, there could be more pressing concerns related to the underperformance of the broader U.S. index levels. Major players like Charles Schwab are expected to pull out funds from the index space, with the Treasury Yield surge hinting at an increase rate surge, pushing up the borrowing costs.

Despite the apprehensions, Rahul believes that sectors like Consumer Essentials and Energy might hold strong due to the long-term growth potential. And just to validate these thoughts, despite the Index downturn, the Energy Index advanced 1.5% on January 3, 2024, bucking the general trend.