The bond market had its own story to tell Thursday, and it was not quite the risk-off narrative you might expect from a record equity rally. The 10-year Treasury yield climbed 8 basis points to 4.37%, its highest close in three weeks, as Goldman Sachs boost of its S&P 500 year-end target to 7,200 triggered a broad rotation out of fixed income and into equities.
The move was orderly but unmistakable. The 2-year yield rose 6 basis points to 3.98%, narrowing the 2s10s spread to 39 basis points — still deeply inverted but moving in the direction of normalization. Bond traders interpreted the Goldman target hike as a signal that the soft landing scenario is now the base case, which reduces demand for duration as a hedge against recession.
Corporate credit showed no signs of stress. Investment-grade spreads tightened 2 basis points to 98 basis points over Treasuries, while high-yield spreads compressed 5 basis points to 312 basis points. The HYG high-yield ETF posted its 12th consecutive daily gain. In credit land, this is about as confident as it gets.
Real yields also rose, with the 10-year TIPS yield climbing to 1.92%. That is actually the more significant move for equity valuation math. Higher real yields mechanically compress equity duration premiums, which is normally a headwind for high-multiple growth stocks. But the market shrugged Thursday — tech was up 2.3%. When real yields rise and tech rallies simultaneously, it tells you the move is about growth expectations improving, not inflation fears.
The Fed was quiet Thursday, but the May FOMC minutes released Wednesday showed a committee content to hold rates steady into the summer while watching for progress on inflation. Several participants noted that financial conditions had loosened since the April meeting. Cracks in the ceasefire narrative? Probably not. This looks more like a garden-variety portfolio rebalancing out of bonds into stocks, driven by a higher growth outlook — not a rates scare.
