Stocks will begin Thursday modestly lower after an ugly downside reversal the previous session. Don’t overanalyze what is happening. Bond traders are putting pressure on President Trump to provide clarity on trade, taxes, and inflation. Bond traders always win.
Since early April, I have been writing about the importance of a 4.6% yield for the 10-year Treasury note. This benchmark sets the tone for mortgage rates and other consumer credit lending trends. Higher rates are bad for the economy, end of story.
One Big Bill
Fixed income traders, often called bond vigilantes, are forcing interest rates higher because they believe government borrowing is excessive and inflation risks are rising. They want higher yields to justify the higher risks to capital that they are now facing.
The offshoot is higher costs of capital to the government. In effect, the bond vigilantes are using their influence to impose fiscal discipline on President Trump. This process accelerated on Wednesday when a 20-year Treasury auction found weaker-than-expected bids.
Stock market bears believe this is the beginning of the end. News that the president’s “Big Beautiful Bill” passed last evening through the House of Representatives supports the bearish narrative. BBB is a victory for the president; however, it will add significantly to the deficit.
There is support for the S&P 500 at 5,767, the 200-day moving average. That level is now definitely in play. At that level, the onus will squarely be on President Trump. He has to pacify the bond vigilantes with clarity on trade, taxes, and inflation.
Bears believe that the president is stubborn and inflexible, although this has been proven incorrect repeatedly. Earlier in the week, I cautioned against chasing new long positions so close to important overhead resistance for the S&P. Now, I would not chase shorts.
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