Frances Newton on Treasury Yield "Shock to the System," Fed's Reaction to Volatility

• The 'breaking point' for yields is driven by the *rate of change*, not just the absolute level, due to record debt in the system.
• A divergence exists between the AI trade (buoyed by liquidity) and other market segments like the Russell 2000 (down 9%), with the S&P 500 making new highs while the Nasdaq lags.
• Rising yields will eventually affect corporate earnings and valuations, making the current AI trade unsustainable, with the Fed likely responding with liquidity facilities.
• Advises caution in yield-sensitive sectors like utilities and suggests property and casualty insurance equities as an alternative to traditional bonds, which are no longer a quintessential hedge.

Frances Newton warns that the speed of rising Treasury yields, not just the level, poses a significant 'shock to the system' given record debt. She highlights a market divergence where the AI trade thrives on liquidity while small caps lag, and predicts a breaking point when high yields impact earnings, forcing a Fed response.