When the Federal Reserve lowered interest rates again by 25 basis points, stock markets expected it. However, U.S. treasury bond prices continued to weaken. This pushed yields higher and risks pressuring mega-cap stocks. The rally in shares of the magnificent seven, which includes Microsoft (MSFT), Apple (AAPL), and Nvidia (NVDA) are at risk of stagnating.
Yields for the 30-year T-bill are especially notable. Look at the ETF (TLT), where prices slipped to $87.80, near a 52-week low. The 30-year yield is 4.77% while the 10-year T-bill is at 4.59%. This will increase mortgage rates, hurting the demand for homes. Since peaking in August, D.H. Horton (DHI) and Lennar (LEN) stocks are well off their 52-week highs. DHI stock is down by 29% from its high for the year.
Yields are rising because the Fed changed from a dovish, rate-cutting tone it set in the summer. In December, Fed Chair Powell said that the central bank needs to beware of inflation that U.S. tariffs cause. When the U.S. imposes 25% tariffs against Mexico and Canadian imports, those countries will retaliate. This increases the price of consumer goods for Americans.
The U.S. government is hoping that neither trading partner will counter with similarly sized tariffs.
Watch out for the risk of the Santa Claus rally fading quickly to start 2025. Markets trade at a premium since they are not pricing in the trade war risks.
