Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / The 10-Year Yield at 4.49 Percent and What It Means for Stocks
Transcript
- Lucas: So the 10-year Treasury yield just hit 4.49 percent on June 17. That's up six basis points from the prior week and roughly 60 basis points from where we started the year. Luna: And the equity market reaction has been interesting. The S&P 500 is essentially flat over the past week, but the Russell 2000 dropped almost 1 percent. Lucas: That divergence is exactly what I want to drill into. Because if you look at history, when the 10-year yield crosses 4.25 percent on its way up, small caps tend to get hit first. They carry more floating-rate debt, their valuations are more sensitive to discount rate changes. Luna: Right. And we saw this play out in 2023 — the Russell 2000 fell 6 percent in September when yields surged from 4 to 4.5 percent. Large caps held up better. Lucas: Exactly. So here we are in June 2026, yields are back at that level, and the same pattern is emerging. But there's a twist. The yield curve is no longer inverted — the 10-year is now 27 basis points above the 2-year. That's a steepener. Luna: Which historically is a good sign for banks and financials. They borrow short, lend long. A steeper curve expands their net interest margin. Lucas: And indeed the financial sector in the S&P 500 has been outperforming the broader index by about 2 percent this month. So the bond market is sending a nuanced signal: yields are high enough to pressure rate-sensitive corners of the equity market, but the shape of the curve is telling us that the economy may be stabilizing, not collapsing. Luna: But the real question is valuation. At 4.49 percent on the 10-year, what equity risk premium are investors earning? I mean, the S&P 500 earnings yield is around 4.2 percent. Lucas: Which means you're getting less than zero spread over risk-free. That's tight. Historically, the equity risk premium has averaged around 3 to 4 percent. So either bond yields need to come down, or stocks need to fall, or earnings need to grow into these valuations. Luna: And when you add the Buffett Indicator — total U.S. market cap to GDP — we're near 200 percent. That's well above the 140 percent long-term average. Lucas: Right. So the bond market is effectively telling us that the risk-free rate is now competitive with equity returns. And that's a real headwind for stocks, especially for the growth names that need cash flows far in the future. Luna: It's also worth noting that the 30-year yield is at 4.93 percent, almost 5 percent. That's a level we haven't seen sustainably since before the 2008 financial crisis. Lucas: And that long end matters for pension funds, insurance companies, anyone with a long-duration liability. They can now lock in nearly 5 percent for 30 years. That makes equities less attractive on a relative basis. Luna: But if the economy stays resilient, earnings can grow into these multiples. Real GDP growth just came in at 1.6 percent annualized for Q1 2026, up from 0.5 percent the prior quarter. That's not booming, but it's not recessionary either. Lucas: And that's the bull case — slow but positive growth, yields stabilizing around 4.5 percent, earnings catching up. But the risk is that yields keep grinding higher. The 10-year could test 5 percent if inflation data comes in hot or if the Fed signals more hawkishness under the new leadership. Luna: And of course, there's the big unknown of the new Fed chair. The headlines are already saying markets expect a 'much more hawkish Warsh Fed.' That alone could keep yields elevated. Lucas: So to bring it back to the listener's portfolio: if you're heavy in small caps or long-duration growth stocks, the bond market is flashing a yellow light. The risk-free rate is now a legitimate competitor for capital. You might want to check your exposure. Luna: And if you're in value or financials, the steepening curve is a tailwind. So it's not all bad news. Lucas: Right. The key is to understand that the bond market is not just a side show — it's the dog wagging the tail. And right now, the dog is saying '4.49 percent and holding.' Luna: I think that's a good note. Let's leave listeners with that thought: pay attention to the 10-year, because it's telling you where the real returns are. Lucas: Honestly, if today's conversation added a little clarity to your thinking, that's the kind of value we aim for. And if it was worth a coffee to you, the link is buy me a coffee dot com slash fexingo. No pressure, just a small way to keep the show ad-free. Luna: Yeah, listener support makes a real difference. And we're grateful for every single one. Lucas: So, back to the data — one more thing I want to highlight. The VIX climbed to 16.78, up almost 14 percent over five days. That suggests options markets are starting to price in a bit more uncertainty. Luna: But 16.78 is still below the long-term average of about 20. So it's not panic, but it's a shift from the complacency we saw a few weeks ago. Lucas: Right. And if yields keep rising, the VIX could follow. So keep an eye on that relationship. It's a gauge of how the equity market is internalizing the bond market's message. Luna: Alright, Lucas. Good episode. Let's do it again soon. Lucas: Absolutely. Thanks for listening.