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- The surge in long-duration Treasury yields mirrors the 1969 Fed tightening cycle, JPMorgan said.
- That year, yields rose for three months after the final Fed interest rate hike.
- The trend ended with a recession, and today's yields might only stop climbing when a downturn kicks in.
With the Federal Reserve's interest rates on pause since July, the upswing in long-duration Treasury yields is not a typical market reaction, according to JPMorgan.
In a note Wednesday, analysts pointed out that in the last 12 Fed tightening cycles, bond markets generally went through a bull steepening — when short-term rates fall faster than long-term rates — after the final rate hike.
But 1969 saw a bear steepening, when long-term yields climb faster than short-term yields. And the current bond market is mirroring this unusual pattern, as a historic Treasury rout has sent yields on both the 10-year note and 30-year bond past the 5% mark.
With markets largely implying that July's quarter-point hike is the last of this cycle, lessons can be drawn from 1969.
"That said, in the 1969 cycle, the recession after the final hike started three months after that final hike, suggesting that the current bear steepening might continue until there are clearer signs of a downshift in growth," JPMorgan added.
So far, recessionary signals continue to be masked by continued strong economic data, with GDP in the third quarter growing at its fastest pace in two years.
JPMorgan also noted that the recession that followed the 1969 tightening cycle had a relatively modest impact on earnings among S&P 500 companies.
"In terms of risk assets, once signs of recession start emerging and using the 1969 US recession as a guide, the picture we get is of equity market declines up to six months after the start of the recession, but a quick recovery after then," analysts added.