The bond-market rally is defying the typical investing playbook. Here's why.

By Joseph Adinolfi

Tech stocks and bond yields are falling in tandem - but it doesn't mean a recession is on the horizon

The bond-market rally is defying typical recession fears.

The U.S. economy expanded at its fastest clip in more than five years during the third quarter, according to the Commerce Department's initial reading on third-quarter gross domestic product. Yet despite a barrage of robust data, Treasury bonds staged a surprise rally in October.

That shift caught market watchers off guard. Throughout August and September, surging Treasury yields weighed on virtually every corner of the market except technology. Investors again treated tech as a safe haven, on the view that the artificial-intelligence buildout could weather higher capital costs. As a result, technology was the only one of the S&P 500's SPX 11 sectors to finish September in the green.

But in October, that dynamic slammed into reverse. As bond yields backed off their highest levels in decades, major benchmarks like the S&P 500 lost ground, even as a majority of index components advanced. The tech-heavy Nasdaq Composite COMP and the 10-year Treasury yield BX:TMUBMUSD10Y moved lower more or less in tandem last month, as Keith Lerner, a market strategist at Truist, pointed out in commentary shared with MarketWatch.

To some observers, the synchronized drop in tech stocks and Treasury yields - compounded by rising crude oil prices - looked like an ominous macroeconomic signal.

"That is one classic sign of a looming recession," wrote Nicholas Colas, co-founder of DataTrek Research, in commentary shared with MarketWatch.

Yet Colas noted that a recessionary scare isn't the only - or even the most likely - explanation. A simpler driver was supply and demand: Corporate debt issuance tied to the AI buildout has begun to cool, leaving fixed-income investors with fewer alternatives. That has helped to funnel money back into Treasurys.

At the same time, Big Tech's late summer run set an exceptionally high earnings bar - one that bellwethers like Alphabet (GOOGL) (GOOG) and Intel (INTC) struggled to clear. As yields eased and tech multiples faced scrutiny, investors rotated toward beaten-down cyclical sectors rather than fleeing equities altogether.

Under the surface, the macroeconomic fundamentals remain resilient. While rising yields, wider credit spreads and a firmer dollar have tightened broader financial conditions, they have yet to derail the expansion. Analysts at 22V Research note that their models continue to signal standard economic growth, with the risk of systemic default remaining low.

The threshold at which higher borrowing costs truly choke off growth remains an open question. While sustained pressure could eventually bite, that would require the Federal Reserve to signal an aggressive return to interest-rate increases, argues Chris Galipeau, head market strategist at Franklin Templeton. For now, Franklin Templeton views a 2022-style tightening cycle - and the steep equity drawdowns that accompanied it - as an unlikely outcome.

Back in 2022, stocks sold off as investors bet that a recession was more or less guaranteed following a series of jumbo interest-rate hikes by the Federal Reserve. But the expected downturn never arrived. Instead, major U.S. equity indexes like the S&P 500 are on track to tally a fourth straight year of double-digit returns.

-Joseph Adinolfi

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11-02-26 1313ET