The 10-year Treasury yield is back above 3% and that may spell another round of downward pressure for US stocks

• The 10-year Treasury yield has climbed back above 3%, a level of pain for US stocks during 2022.
• The S&P 500 twice this year dropped for weeks after the bond yield surpassed 3%, said Bespoke Investment Group on Tuesday.

The 10-year Treasury yield's rebound back above 3% pushes US stocks on a path of potential losses over the next few weeks, Bespoke Investment Group said Tuesday.

The 10-year yield was in focus after spiking through 3% on Monday for the first time in a month. It advanced further on Tuesday to as high as 3.075% before trimming the increase to 3.02%. Stocks on Tuesday, meanwhile, clung to thin gains after suffering their worst decline in two months in the previous session.

"It's getting to the point where you can set your clock to it. When the yield on the 10-year US Treasury hits 3%, sell stocks," Bespoke said in a note.

In May, the S&P 500 fell 5% in a week and 1% over the next month after the 10-year yield hit 3% for the first time since 2018. In early June, the equity gauge dropped 9% in the next week and 7% over the next month after the yield revisited the 3% threshold for the first time in four weeks. On Monday, the S&P 500 stumbled by 2.1%.

Investors have been selling bonds, driving yields higher, ahead of the Federal Reserve's annual symposium in Jackson Hole, Wyoming, that starts Thursday. Fed Chairman Jerome Powell on Friday may signal that policymakers are prepared to keep aggressively raising interest rates to chop down high inflation. Higher interest rates eat into the value of bonds.

"You can't fault equity investors for being uneasy given the moves we have seen in the US Treasury market lately," the firm said. "Back in mid-June, the year/year change in the 10-year yield was more than 200 basis points, and it still stands at 177 bps. That magnitude of change in the span of a year is practically unheard of during the careers of most people currently on Wall Street."

Other periods when the 10-year Treasury note experienced a larger year-over-year increase in yield include 1994, 1987, 1984, and multiple periods from 1979 through late 1982.

"One key difference between the current period and those other periods ... is that the current level of yields is extremely low relative to history. While yields are still just barely above 3%, in every other period, the 10-year yield was at least 6% and many times much higher than that," said Bespoke.

Before the COVID-19 pandemic, the 10-year yield had never doubled in the span of a year. But in the year coming out of the virus shock, the yield nearly tripled. "That kind of shift in the interest rate backdrop almost makes it impossible not to have some major bumps in the road," the firm wrote.