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WHAT DO RISING US TREASURY YIELDS DENOTE?

The risk of U.S. Federal Reserve interest rate hikes over the next year is rising, Deutsche Bank said, as both households and Treasury market pricing now signal a shift towards higher rates.

The brokerage pointed to the Conference Board's net interest rate expectations indicator, which "clearly shifted in the direction of foreseeing higher rates over the next twelve months."

And now U.S. Treasury market pricing are adding to the rate hike narrative, Deutsche Bank said.

The 2-year U.S. bond yield last closed at 4.03% on Wednesday and is currently trading at 4.10%, while the Fed's current policy rate stands at 3.50%-3.75%.

"Rising spread between 2-year Treasury yield and fed funds rate pointing to rate hike risk," the brokerage said in a note on Wednesday.

If sustained, the gap between the 2-year yield and the Fed funds rate would widen to its highest level since late 2022, the brokerage added.

"A regression using this relationship implies an increase in the fed funds rate over the next year of roughly 30bps," Deutsche Bank said.

TECH AND AI CUSHION EQUITIES DESPITE DANGER ZONE YIELDS

Long-end U.S. Treasury yields have clearly moved into the “danger zone,” following the April Fed meeting, though risk assets have so far remained largely unaffected, HSBC said in a separate note on Thursday.

HSBC notes the following reasons for soaring Treasury yields to not put significant pressure on the benchmark equity and credit indices.

The level of U.S. rates volatility is still much lower compared to 2025 and 2024; outperformance of tech and AI names has resulted in those names now making up more than half of S&P 500 index, HSBC said.

"The close-to-100% EPS beat rate coupled with strong forward guidance of the US tech sector in Q1 is therefore cushioning the overall US equity market," the British brokerage added.

Yet, when looked at further beyond broader tech, the story looks different.

"When we look beneath the surface of headline equity and credit benchmarks, there is definitive signs of higher yields biting," HSBC warned, given the heavy concentration of tech and AI within the S&P 500 and the rather poor breadth of outperformance.

(Akriti Shah)

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