Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / What the 10-Year Yield at 4.55 Means for Your Portfolio
Transcript
- Lucas: The ten-year Treasury yield closed at four-point-five-five percent on Friday. That's up eight basis points from the week before, and it's the highest we've seen since late April. Luna: And the Nasdaq dropped four-point-three percent over the same five days. Coincidence? I don't think so. Lucas: Right. The timing is too tight. When the risk-free rate goes up, every other asset has to reprice. The ten-year is the benchmark that everything else is priced against—mortgages, corporate bonds, and yes, stock valuations. Luna: So walk me through the math. How does a move from four-forty-seven to four-fifty-five actually hurt stocks? Lucas: It's the discount rate effect. When you value a stock, you discount its future earnings back to today using a rate that's tied to the ten-year. If that rate goes up, the present value of those future earnings goes down. For growth stocks—where most of the value is in earnings far in the future—the impact is magnified. Luna: That's exactly why the Nasdaq is getting hit harder than the Dow. The Dow is only down one percent, while the Nasdaq is down over four. Lucas: Exactly. The Dow is full of value and dividend stocks—companies like Johnson & Johnson, Coca-Cola—where the cash flows are happening now. The Nasdaq is heavy on tech where you're betting on 2028, 2029 earnings. Those get crushed when rates rise. Luna: But it's not just the level of the yield. The curve is steepening too. The spread between the ten-year and the two-year is now forty-one basis points. That was thirty-eight a week ago. Lucas: That's a big deal. A steepening curve usually means the bond market expects stronger growth and maybe higher inflation. But it also means the Fed is less likely to cut rates anytime soon. The hot jobs report on June 5 basically confirmed that—the economy added way more jobs than expected, and Chair Warsh is now facing pressure to keep rates higher for longer. Luna: So the market is pricing in no rate cuts for the rest of the year. That's a 180 from January when everyone thought we'd get three cuts. Lucas: Yeah, the narrative has completely flipped. And the VIX is at eighteen-point-nine-two, up twenty percent in five days. That's not panic territory, but it's definitely unease. The VVIX is at ninety-two, which is elevated, so options traders are hedging for bigger swings. Luna: Let's talk about what this means for a regular investor. If you have a sixty-forty portfolio, your bonds are getting hit too, right? Lucas: Absolutely. Bond prices move inversely to yields. If you're holding a ten-year Treasury that you bought when the yield was three percent, its price has dropped significantly. That's duration risk in action. The longer the maturity, the more sensitive the price is to yield changes. Luna: So what do you do? Shorten duration? Go into cash? Lucas: It depends on your time horizon. If you need the money in the next year, yeah, cash or very short-term bonds are safer. But if you're investing for the long term, locking in a four-fifty-five percent yield on a ten-year bond is actually attractive. You're getting a real yield above inflation. That hasn't been the case for most of the last fifteen years. Luna: So you're saying bonds are back as an asset class? Lucas: I think they are. For the first time in a long time, you can build a portfolio where bonds actually provide income and a buffer against equity risk, rather than just being a drag. But you have to be careful about duration. I'd rather own intermediate-term bonds right now—five to seven years—than go out to thirty years, where the yield is five-point-zero-one percent but the price volatility is brutal. Luna: And on the equity side, are there sectors that actually benefit from rising yields? Lucas: Financials tend to do well because banks can charge more on loans. Also, value stocks and dividend payers hold up better. Energy and materials can benefit if the steepening curve reflects real economic growth. But the high-growth, no-earnings tech stocks? That's where the pain is concentrated. Luna: It's funny, you know, we talk about all this on the show and people write in saying, 'This stuff actually helps me think about my 401k differently.' That's the whole point of what we do here. Lucas: Yeah, and it's exactly why we keep the show ad-free—so we can say what we actually think without someone sponsoring the message. If the conversations here have helped you think about a decision or given you a useful framework, the best way to keep that going is to support the show directly. We're on buy me a coffee dot com slash fexingo. It's how we stay independent. Luna: Yeah, and it really does make a difference. Even a small contribution helps us keep doing the research and bringing you these conversations without any outside pressure. Lucas: Alright. So back to the yield curve. One thing that's different from 2022 is that the curve was inverted then. Now it's steepening from inversion. That's a classic signal that the economy is transitioning from late-cycle to possibly recession—but the data doesn't show recession yet. GDP growth is at one-point-six percent annualized, which is slow but positive. Luna: So the bond market is telling a different story than the stock market. The S&P 500 is at seventy-four-oh-six, down two-point-seven percent in five days. That's a correction within an uptrend. Lucas: Right. And the big question is whether the ten-year yield keeps climbing. If it breaks above four-point-seven-five percent, which was the October 2023 high, then we could see another leg lower in equities. But if it stabilizes here, the sell-off might be a buying opportunity for long-term investors. Luna: What's your base case? Lucas: I think yields stay elevated—maybe between four-fifty and five percent—through the rest of 2026. The economy is too strong for the Fed to cut, and inflation is sticky around three percent. That means the ten-year isn't going back to three percent anytime soon. Investors need to adjust to a higher for longer world. Luna: And adjust means not chasing the Nasdaq at twenty-five thousand nine hundred and thirty, and maybe looking at dividend stocks or shorter-duration bonds? Lucas: Exactly. It's about being positioned for a regime where the risk-free rate actually offers competition to equities. That's a healthy thing in the long run, but it takes some getting used to. Luna: The one number that still bothers me is the VIX at eighteen-point-nine. It's not screaming fear, but it's up twenty percent in a week. That's a bigger move than the S&P's drop. Lucas: Yeah, the VIX is signaling that the complacency of April and May is gone. The vol market is repricing for uncertainty around the Fed path and the yield move. If the ten-year keeps climbing, the VIX could easily go to twenty-two, twenty-three. That's not crisis level, but it's a regime change from the low-teens we saw earlier this year. Luna: So what's the one thing our listeners should do this week? Lucas: Look at the duration of your bond holdings. If you're in long-term bond ETFs, check how much they've dropped. If it's more than you're comfortable with, consider moving to shorter maturities. On the stock side, don't panic-sell growth stocks, but do check your exposure. If more than thirty percent of your portfolio is in high-growth tech, maybe trim a little into strength. And above all, remember that four-point-five-five percent on a ten-year is a perfectly respectable return for the safe part of your portfolio.