Bond yields have been a key indicator for stock sentiment in recent weeks. As yields have surged to 16-year highs, the S&P 500 has slowly given back yearly gains.
Truist co-chief investment officer Keith Lerner doesn't see that correlation changing anytime soon.
"For equities to have a sustainable rally, interest rates likely need to stabilize," Lerner wrote in a new research note on Monday. "And while calling a top in yields, which have had so much upward momentum, has been a fool’s errand to say the least, our best estimate is that buyers for the 10-year US Treasury yield will step in more aggressively as we approach the 2006/2007 highs near 5.25%."
Lerner explained to Yahoo Finance that 5% is likely a psychological level for many investors that will make them consider a fixed income investment as yields hit a round number they haven't seen in 16 years.
Currently three-month and 2-year Treasury yields are higher than 10-year yields. That has made them more appealing to investors.
"Are there a lot of people buying 10-year bonds right now? Probably not." Lerner said. "I'm seeing much more interest in the short end. But to get more interest in the long end almost by default you need rates to move up somewhat higher."
That could take some time. The last time 10-year yields were this high 16 years ago, bond traders held out on buying until real yields — those adjusted for inflation — peaked at about 2.8%. That could be what investors are waiting for again this time, Lerner says.
While real rates have risen as yields have spiked and inflation has largely fallen over the last several months, the current roughly 2.5% adjusted rate is below the recent historical high.
"What you're trying to do is beat inflation over time," Lerner said.
Lerner isn't alone in thinking that the key for stocks to fall will be yields settling down.
"Volatility has been elevated," Charles Schwab strategist Kathy Jones told Yahoo Finance Live this week.
"And it probably is going to continue to be because a lot of that has to do with uncertainty about the direction of [monetary] policy."
But if Lerner's call for 25 more basis points to the upside in the 10-year yield is right, investors may be stuck waiting longer for the rise in yields to clear a path upward for stocks.
Josh Schafer is a reporter for Yahoo Finance.
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