Spiking US bond yields risk a situation similar to one that ousted former British PM Liz Truss, Apollo chief economist says

• US bond yields are surging, risking a stock market decline similar to 2022, according to Apollo's Torsten Slok.
• The Apollo economist said President-elect Donald Trump's spending plans could spark a bond market rebellion.
• Such a scenario would lead to potential Fed rate hikes in 2025, shocking investors who are pricing in cuts this year.

Surging US bond yields and a potentially massive deficit spending program under the incoming Donald Trump administration risk a "Liz Truss moment" that could spark a painful decline in the stock market.

Apollo economist Torsten Slok told Bloomberg on Tuesday that investors need to consider a repeat of 2022, in which bond yields rose and stock prices fell, as a real risk for this year.

"Higher for longer has a number of consequences that are bringing back memories of what we saw in 2022 when you had rates going up, and stocks going down at the same time," Slok said.

The 10-year US Treasury yield surged six basis points on Tuesday to nearly 4.70%, representing its highest level since April 2024. The bond yield surge sparked a sell-off in fast-growing tech stocks, with the Nasdaq 100 index down about 1%.

Slok recalled the situation in the UK that slammed markets in 2022. At that time, the UK bond market reacted furiously to then-Prime Minister Liz Truss's tax cut plans. The market upheaval almost led to a collapse of UK pension funds and ultimately contributed to Truss's resignation from the top job.

The Trump administration's plans to unveil a combined spending bill and tax cuts could scare the bond market considerably, as it would likely lead to increased deficit spending. The bond market is already grappling with the Federal Reserve's quantitative tightening program, an unsustainable fiscal deficit, and sky-high Treasury issuances.

"It used to be that these bills would be two separate bills. One with border and security in the first bill that would be dealed with first. And then later we'll deal with what's going on on the tax front," Slok explained.

The potential for a big headline number related to Trump's upcoming spending bill "raises at least modestly the probability that we'll get at least potential Liz Truss moment," Slok said.

A bond market rebellion may already be brewing. The 10-year US Treasury yield has surged 100 basis points in roughly the time that the Fed has cut its benchmark rate by 100 basis points.

"This is highly unusual," Slok said in a note on Tuesday. "The market is telling us something, and it is very important for investors to have a view on why long rates are going up when the Fed is cutting."

While the positive spin on rising interest rates could be that the economy is still on strong footing, the potential negative catalysts for rising bond yields could be detrimental to markets.

"We already have discussions literally every day when we have a Treasury auction around, 'hey what was the metrics on the auctions and what are these numbers telling us in terms of the overall fiscal sustainability,' which Jay Powell of course always keeps on pointing out is already unsustainable," Slok said.

This increases the risk that the Fed could actually hike interest rates in 2025, which would be a shock to investors who are expecting at least two interest rate cuts this year.

Slok assigns a 40% probability that the Fed will raise interest rates in 2025

If central bankers proceed with a surprise interest rate hike, it could be a shocking blow to the stock market, which has seen a massive rally over the past two years, particularly in richly valued tech stocks like Tesla and Nvidia.

"I do think some of these more sensitive names, they will certainly see a bigger hit," Slok said, referring to stocks with historically high price-to-earnings ratios.