US bond yields raise risks for equities as credit spreads widen: Jefferies

The brokerage said the US 10-year and 30-year Treasury yields, at 5.34 per cent and 5.69 per cent, respectively, had reached their highest levels that week since April 2002 and May 2002, respectively. The sharp rise in yields is becoming increasingly important for equities, particularly amid the emergence of a more hawkish Federal Reserve.

Jefferies said the two-year Treasury bond yield had reached a peak of 4.96 per cent that week, or 108 basis points above the midpoint of the federal funds rate, which it viewed as a sign that more rate hikes were coming.

While a two-year Treasury bond yield at a peak of 4.96% this week, or 108bp above the midpoint of the federal funds rate, should be seen as a sign that more rate hikes are coming. the report noted.

The report noted that the bond sell-off had also triggered a pickup in both market volatility and credit spreads. The MOVE Index, which tracks volatility in the US Treasury market, was almost back at the level prevailing when the US-Israel attack on Iran was launched, while US high-yield spreads had also begun to move.

Jefferies said the development was significant because bonds represent collateral in a highly leveraged financial system, while the real damage in the credit space, particularly private credit, may not be visible on a mark-to-market basis.

At the same time, strong corporate earnings have so far allowed US equities to withstand rising bond yields and geopolitical tensions. LSEG I/B/E/S data cited in the report showed that S&P 500 third-quarter 2026 earnings are expected to grow 30.2 per cent year-on-year, compared with 16.1 per cent growth expected a year ago. Information technology earnings are expected to rise 65.1 per cent.

This is the key reason why US equities have so far been able, more or less, to ignore rising bond yields and rising geopolitical tensions, the brokerage said.

However, Jefferies said the sustainability of the equity rally will increasingly depend on the duration of the AI capital expenditure cycle and whether the massive spending generates adequate returns.

The report also pointed to some moderation in near-term expectations for US rate hikes. Core PCE inflation rose 3 per cent year-on-year in August, below the 3.3 per cent consensus expectation. Money markets were pricing in around 30 basis points of further rate hikes by the end of 2026, down from 52 basis points in mid-September.

Still, Jefferies said the combination of elevated bond yields, rising credit-market volatility and questions over the durability of AI-led earnings growth would remain key issues for equities going forward. (ANI)