Why the bull market for stocks may now hinge on the 10-year Treasury yield

U.S. stocks ended the week at fresh record highs Friday, but the sustainability of the rally now likely hinges on the 10-year Treasury yield, according to Ron Albahary, chief investment officer at Laird Norton Wetherby.

Stocks pushed deeper into record territory after the Federal Reserve’s first interest-rate cut in nine months on Wednesday, adding to optimism that lower rates might prolong the bull market.

The S&P 500 SPX, Dow Jones Industrial Average DJIA and Nasdaq Composite COMP indexes all closed at new highs to end the week, while the rate-sensitive Russell 2000 index RUT of small-cap stocks took a breather a day after it logged its first record close since 2021.

All four indexes also posted large weekly gains despite the climb in longer-duration Treasury yields, which kept upward pressure on 30-year mortgage rates.

See: Why mortgage rates are actually going up after the Fed cut interest rates

Albahary at Laird Norton, a wealth-management firm overseeing about $16 billion in assets, believes that’s a sign of “some dissonance” in markets. He worries the bull market now needs tame 10-year Treasury yields BX:TMUBMUSD10Y and the “bond vigilantes” to stay at bay.

On that front, Albahary thinks investors may be too complacent about potential Fed interference by the Trump administration, especially after Fed Chair Jerome Powell’s term ends next year. If those fears grow, he sees potential for longer-duration bond yields to rise, despite Fed rate cuts.

Read: Trump ally Miran defends Fed vote for deep interest-rate cut, says tariffs aren’t inflationary

“I am worried about significant steepening of the yield curve,” Albahary said. “That’s going to slow the economy down.”

Yields in the Treasury market ended Friday’s session at their highest levels since Sept. 4-5, according to Dow Jones Market Data. For the week, 10-year and 30-year yields BX:TMUBMUSD30Y rose roughly 8 basis points each to almost 4.14% and 4.76%, respectively — their biggest weekly advances since July.

On the flip side, climbing Treasury yields could reflect fewer jitters about the labor market, with the Fed penciling in a couple more potential rate cuts later this year.

“I thought it was appropriate to cut rates by 25 basis points,” Niladri Mukherjee, chief investment officer at TIAA Wealth Management, told MarketWatch. “This probably gives some benefits to the U.S. economy in the next six to 12 months.”

Lower-income consumers who tend to carry higher debt loads could stand to benefit the most from lower rates, as could rate-sensitive parts of the economy like housing and small businesses, Mukherjee said.

“Our view is the U.S. economy can chug along as the Fed reduces interest rates,” he added.

The Fed appears more focused on supporting a weaker labor market than it was a few months ago, Mukherjee noted, even while inflation has been edging further away from its 2% annual target.

Still, with stocks at record highs, Albahary at Laird Norton said he has been leaning into ways to hedge volatility while “hedging is cheap.”

“We still have the most exposure to equities,” he said. But outside of stocks, he likes infrastructure, hedge funds focused on taking advantage of volatility, and other potential “shock absorbers” if turmoil in markets picks back up.