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Markets are now rising.

Treasury yields were not expected to be this low, and whatever the cause, this could be terrible news for equities. On Wednesday, the 10-year Treasury yield fell 0.05 percentage point to 1.321 percent, after briefly trading below 1.30 percent earlier in the day. That’s a far cry from the 1.749 percent peak reached on March 31, when economic optimism was at an all-time high.

It’s not like the economy has been particularly bad. Yes, most leading indicators, including ISM surveys, have retreated from their peaks, while the employment market continues to recover at a slower-than-expected rate. However, the figures all point to a faster recovery than the one that followed the 2008 financial crisis. It’s easy to reject the change in Treasury yields—many people do, asking how they can justify buying an asset that would lose money after inflation—but we believe the financial markets are typically attempting to tell us something. The difficult part is deciding what to do. Michael Darda, a strategist at MKM Financial Partners, suggests two possibilities. The first is that, according to FactSet, the bond market is pricing in “near recessionary” growth next year, much below the 4% forecasters expect in 2022. That means earnings expectations for next year are considerably too high, and the stock market would have to decline to compensate for the lower growth rate. To put it another way, to compensate for a lower E, the P in the Price/Earnings ratio would have to decline. The relative resilience of high-yield bonds, which have held up well even as Treasury yields have fallen, is arguing against that, at least for the time being. Another factor, according to Darda, is that the Fed’s bond purchases, combined with the return of money to the Treasury (which is then used to buy bonds), is lowering rates across the board. If this is what is causing yields to fall, the Fed will eventually have to stop buying bonds, which will lead yields to climb, most certainly above 2%. Higher rates lower values, thus prices would have to fall even if earnings stayed the same to compensate for the lower P/E ratios. In any case, the stock market is in a difficult situation. “[We have] concerns about the market being in a ‘wedge,’ challenged on one side by earnings deterioration and on the other by a potential real rate reversal (which would compress valuations),” Darda argues. The stock market, for the time being, can’t seem to make up its mind. Even with the release of the minutes from the Fed’s June meeting on Wednesday, minutes that indicate, well, not much. The

The Dow Jones Industrial Average is a stock market index that measures how well

The S&P 500 has risen 95.12 points, or 0.3 percent, while the

S&P 500 Index

has increased by 0.4 percent, and

The Nasdaq Composite Index

has increased by 0.1 percent. If the S&P 500 and Nasdaq close at these levels, they will be at all-time highs. Just keep an eye on the yields on such bonds. Ben Levisohn can be reached at More