The 10-Year Treasury Yield ($TNX) is largely positively correlated with the S&P 500 - and also shows a propensity to lead the stock market. Notice how the 10-Year Treasury Yield peaked in July 2007 and stocks peaked in October 2007 (3 months later). Similarly, the 10-Year Treasury Yield bottomed in December 2008 and stocks bottomed in March 2009 (again 3 months later). The 10-Year Treasury Yield now has peaks in early June and early August.
In addition, the 10-Year Treasury Yield broke below its July low with a decline into early October. Should the 10-Year Treasury Yield again precede the stock market by 3 months, I would expect the S&P 500 to peak in October (three months after the June peak in TNX). More recently, yields have since rebounded the last few weeks and this is positive for stocks. Yes, rising yields (falling bonds) are bullish for stocks. Rates rise when the economy is strong, not when the economy is weak. By extension, a strong economy is bullish for stocks.
Short-term rates are a different story. The chart below shows the 1-Year Treasury Yield ($UST1Y) and the S&P 500. There is clearly a negative correlation between these two. Short-term rates peaked in March and declined into early October. During this timeframe, the S&P 500 bottomed in March and hit a new reaction high in October. Short-term rates bounced in October, but hit resistance and pulled back the last two weeks. This pullback weighed on the Dollar and benefited stocks. I am watching to see if the 1-Year Treasury Yield forms a higher low and breaks resistance. This would be negative for stocks and positive for the Dollar.
The US Dollar Index ($USD) and the 1-Year Treasury Yield ($UST1Y) are positively correlated. As the chart below shows, both have been moving lower since March and both hit new lows in October. This downtrend is bullish for stocks and bearish for the Dollar. Despite this downtrend, the 1-Year Treasury Yield bottomed ahead of the US Dollar Index in October and shows a little divergence. This could foreshadow a trend reversal, but I will wait for a breakout before calling an uptrend in short-term rates.
