Bond yields have been climbing this week, with the yield on the 10-year Treasury hitting a four-year high.
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As bond yield have climbed U.S. stock market is having a rough week. The Dow Jones Industrial Average and S&P 500 are on track for the biggest weekly declines in two years (for the Dow since Jan. 8, 2016; for the S&P since Feb. 5, 2016). The Nasdaq is looking at its biggest drop since Nov. 4, 2016.
While bond yields increased earlier this week, they received an additional boost following the Federal Reserve’s two-day policy setting meeting, during which Fed officials indicated that they expect inflation to move higher this year.
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According to Bank of America Merrill Lynch, bond yields have higher to go. “We think that the market is mispriced and will ultimately capitulate to the Fed, sending rates higher,” according to a research note from the bank.
As bond yields increase, investors are drawn away from riskier equities and as a result, stock prices can pull back.
