US Bond Yield Surge Sparks Fears of Stock Market Sell-off

Global stock markets are showing surprising calm despite a historic surge in U.S. Treasury bond yields, which have reached a record high of 5.2%. However, some analysts, like Tony Pasquariello of Goldman Sachs, warn that the positive impact of corporate earnings is fading, potentially leading to a stock market downturn.

Pasquariello identifies the bond market as the most immediate risk to equities, noting that "debt and deficit issues" are currently dominating market attention. While major U.S. indices like the S&P 500 and Nasdaq have seen modest gains recently, European markets have experienced declines, with the CAC 40 down 3% and the German DAX down 3.6% in the past month. Asian markets have been more stable.

The primary concern is a potential "spillover effect" where rising U.S. bond yields make these safer investments more attractive than stocks. Investors might begin selling stocks to buy bonds, triggering a sell-off. This phenomenon is already being observed in the Israeli bond market, with Israeli government bond indices experiencing intra-day drops of 0.3%-0.4%.

Despite recent volatility, the Israeli "Tel Gov General" bond index is still up 1.7% year-to-date. However, the fear is that U.S. bonds offering a 5.2% yield will pressure Israeli bonds to behave similarly. The Israeli "Tel Gov 10+ Shekel" index, representing longer-term bonds, has fallen 2.7% since early September, with its implied yield rising to 4.4%, nearing a yearly high. This indicates a perceived increase in risk among investors in Israel.