The Bond Market Can No Longer Be Ignored

Dear Reader,

This is Dylan Jovine with Behind the Markets.

Happy Tuesday. Today is Tuesday, May 19th.

I got here early this morning — beat the lady from a couple doors down who's been competing with me all week for the best parking spot.

She was winning last week while I was sick.

Today I'm back.

Small victories.

The headline of the day is Treasury yields, and they are back at levels that matter for stocks and your portfolio.

The Bond Market Can No Longer Be Ignored

The 30-year US Treasury yield is at 5.12% — near 20-year highs.

Think about that.

I could lend the government money for 30 years and they'll pay me 5.12% a year.

The 10-year yield, which concerns us more as stock investors, is up to 4.59% — the highest in 12 months.

Remember the seesaw relationship.

Yields go up, stock prices go down.

Yields go down, stock prices go up.

Bond yields exert the biggest gravitational pull on equities, on house prices, on all asset prices.

When yields move like this, everything else feels it.

What the Betting Markets Are Saying

At the start of the year, betting markets were pricing in a high probability of Fed rate cuts this year.

Those expectations have all but disappeared.

We're now looking at a 27% chance of a rate cut — and growing bets that the Fed actually raises rates.

The bond market is driving this.

The Fed doesn't want to get out of step with the bond market — it would destroy their credibility — so they follow it.

And the bond market is telling us: CPI is up, PPI is up, inflation is seeping through everything.

The stapler costs more.

The metal inside it costs more.

The plastic costs more.

The truck that delivered it costs more.

That is where we are.

The Middle Phase

Here is something I've learned in 35 years of doing this.

Bull markets are easy.

Everything's going higher, everybody's a hero.

Bear markets are easy.

Everything's going lower, the playbook is clear.

But most of the time you're in the middle phase.

Strong bull arguments on one side.

Real bear risks on the other.

And you're making probabilistic bets.

That is what investing actually is.

You're not picking certainties.

You're betting on odds.

Last week I put the probability of a serious sell-off or bear market at 30% to 35%.

I'm moving that up to 40% now.

Iran is not resolved.

The hardliners are clearly in charge over there.

And the president looks very likely to ramp up military action, which would send the market down.

What We Are Doing

If I'm the captain of the airplane right now, I'm telling you: fasten your seatbelts and expect some turbulence.

This is normal.

In 35 years of doing this, probably 20 to 25 of them have been spent in exactly this middle zone.

If you have speculative positions — stocks that never consistently earn money, positions you were never fully sure about — now is the time to lighten those.

Take in your sails a little.

Get ready.

You'll see us making some moves in our portfolios in the days ahead.

Anyway, that's all I have for you today.

Have a wonderful Tuesday.

I will see you tomorrow.

“The Buck Stops Here,”