Treasury Rally Rescues Quarter and First Half Returns

A June rally in US Treasuries, driven by a sharp drop in inflation expectations, has rescued returns for the quarter and the first half of the year. The move reversed a lackluster performance in the first five months, when rising yields pressured bond prices. The 10-year Treasury yield fell from around 4.6% in late May to near 4.3% by mid-June, while the 2-year yield declined from 5.0% to 4.7%, reflecting a steepening of the yield curve. This rally was fueled by softer-than-expected inflation data, including a cooler Consumer Price Index reading for May, which pushed breakeven rates—the market's implied inflation forecast—down by roughly 20 basis points. For fixed-income investors, the rebound meant that the Bloomberg US Aggregate Bond Index turned positive for the quarter after being down earlier.

The collapse in inflation expectations, as measured by breakeven rates, allowed longer-dated Treasury yields to fall, boosting bond prices. For equity traders, this shift is significant because lower yields reduce the discount rate applied to future corporate earnings, supporting valuations. The so-called Fed model, which compares the S&P 500 earnings yield (around 5.3% based on forward estimates) to the 10-year Treasury yield, now shows a wider spread, making stocks more attractive relative to bonds. Additionally, the decline in real yields makes equities comparatively more appealing, potentially driving a rotation into cyclical sectors like technology and industrials. Breadth indicators have improved, with the percentage of S&P 500 stocks above their 50-day moving average rising to 65% from 40% in May. Buyback yields remain elevated near 3.5%, providing further support, while options-implied volatility, as measured by the VIX, has eased to around 13, suggesting reduced hedging demand. Live stock prices and charts on NowPrice show how markets are reacting to this macro backdrop.

Looking ahead, traders will monitor upcoming inflation data, particularly the Consumer Price Index and Personal Consumption Expenditures reports, to confirm whether the easing in inflation expectations is sustained. The Federal Reserve's policy stance remains key; any hawkish signals could reverse the rally. Also watch for Treasury auction demand, as supply concerns could re-emerge and push yields higher. The forward P/E for the S&P 500 currently sits at 20.5x, above the 10-year average of 18x, leaving valuations vulnerable if yields spike. Sector rotation will be critical—if financials and small caps start outperforming, it could signal a broadening of the rally beyond mega-cap growth stocks.