The US interest rates is filtering through the bond market into corporate earnings and financing, with widening credit spreads and delayed IPOs signaling a need for caution. Some investors have begun rebalancing their portfolios to reduce exposure to interest-rate-sensitive assets, while concerns regarding fiscal stability and sovereign debt sustainability continue to grow.
Bolstered by the AI boom, the S&P 500 and Nasdaq 100 remain resilient, yet signs of fragility across global financial markets are becoming more widespread. Sustained high oil prices and borrowing costs are impacting bond, credit, and small-to-mid-cap equity markets, while the performance of large-cap tech stocks masks a growing divide within the US equity landscape.
This week, the US 10-year Treasury yield briefly neared 5.4%, marking its highest level since 2002, while Brent crude oil remained above $100 per barrel. These factors have fueled fears that the current inflation shock could be prolonged. Global financing costs have also seen a broad increase, with UK government borrowing costs reaching a 19-year high and the French government bond market experiencing similar strain.
Despite volatility in the bond market, major US stock indexes have shown notable resilience. The S&P 500 reached a record high on Tuesday, retreated over the following two trading days due to concerns regarding AI demand, and rebounded on Friday following optimistic corporate earnings reports, leaving it near its all-time high.
Market Breadth Reveals the Real Pressure
Continued US economic growth has allowed investors to temporarily overlook risks stemming from rising Treasury yields and geopolitical instability. However, internal market metrics suggest that the strength of major indexes is not supported by the broader market. Currently, only about one-third of S&P 500 constituents are trading above their 50-day moving averages, indicating that index gains are being driven by a small group of heavyweight stocks.
The Russell 2000 Index, which is more sensitive to interest rate fluctuations, faces a more difficult environment, with only 27% of its small-cap stocks trading above their 50-day moving averages. This reflects the intense pressure high financing costs are placing on smaller firms with significant capital requirements. Notably, when the S&P 500 hit a record high this week, only 30% of its components were above their 50-day moving averages—the lowest proportion for a record-high trading day since Bloomberg began tracking this data in 1990.
The shock of high interest rates is spreading from the bond market to other asset classes. In the credit sector, borrowers with the lowest credit ratings are now facing financing yields of approximately 15%, creating a heavy burden for companies looking to refinance debt. Recently, credit spreads on US high-yield corporate bonds have continued to widen, and the price of a junk bond ETF has dropped to levels near the lows seen during the market selloff triggered by the tariff war last spring.
Corporate financing and listing activity have also been impacted, with several high-profile companies delaying their IPO plans. New York Stock Exchange Group President Lynn Martin attributed this trend to rising interest rates. However, the current rate shock has not yet caused a total investor retreat from risk assets; instead, it has manifested as portfolio rebalancing, with investors gradually trimming their allocations to assets vulnerable to bond yield volatility and elevated financing costs.
