Stocks surged and U.S. government bonds rose from 16-year lows due to falling Treasury yields.

This paradox highlights the relationship between rates and financial conditions, which indicate an economy’s funding availability.

As yields fall, investors worry that financial conditions could become too slack for the Federal Reserve, forcing it to keep rates higher longer to prevent inflation from rising.

The Goldman Sachs Financial Conditions Index’s 0.5% loss last week, its sixth largest weekly drop since 1990, showed the yield-financial conditions relationship

Rising yields might replace Fed rate hikes if financial conditions tighten.

However, TD Securities analysts anticipate Treasury yield softening will become a “double-edged sword” as markets will relax if the Fed appears dovish by delaying rate hikes.

Futures markets now expect the Fed to maintain rates constant at its December meeting and begin rate decreases in May 2024.