As U.S. bond yields march higher, when should stock investors get worried?

Reuters2021-02-18

NEW YORK, Feb 18 (Reuters) - As the benchmark 10-year Treasury yield hits its highest levels in a year, investors are gauging how high bond yields can rise before they threaten a stock rally that has seen the S&P 500 gain 76% from its March 2020 nadir.

Bond yields plummeted to record lows after the Federal Reserve cut rates to near-zero in the early days of the coronavirus pandemic, driving money into stocks as investors preached TINA, an acronym for “there is no alternative.”

With the 10-year yield hovering around 1.3%, that calculus could change for some investors, though there is little consensus on where that tipping point could be.

A quick jump up in yields “is something that certainly poses a significant risk,” said Padhraic Garvey, head of research, Americas at ING.

“What we don’t want to see in the very near term is (the 10-year yield) hitting 1.40%, 1.50% and still looking up,” he said, noting it could make equities seem less attractive than safe-haven Treasuries.

Yields and stocks have risen together over the past year, on optimism that fiscal and monetary stimulus combined with a country-wide vaccination program will drag the U.S. economy out of its pandemic-induced downturn.

But stocks could start losing their allure if the 10-year yield hit 2%, analysts at JPMorgan said. They expect, however, the 10-year will finish the year at 1.45%.

“We believe that bond yields are likely to move higher from here, and that the move should be absorbed well by the equity market,” the bank’s analysts wrote in a note earlier this week.

Citigroup put the tipping point for the 10-year at 1.7%, while Nomura said a 1.5% yield could spark a correction of as much as 8% in stocks.

Higher yields could be a particular concern if they start to hit the big technology and communications stocks that powered markets higher for much of the last year. Tech and other growth stocks with longer duration cash flows are more sensitive to rising yields as those flows are discounted at higher rates.

The five largest companies in the S&P 500 by market value - Apple, Microsoft, Amazon, Alphabet and Facebook - account for about 22% of the weight of the benchmark index.

Still, the equity risk premium, which compares the earnings yield on stocks to the yield on the 10-year Treasury bond, currently favors equities, according to Keith Lerner, chief market strategist at Truist Advisory Services.

When the equity risk premium historically has been at the level it was on Tuesday, the S&P 500 has beaten the one-year return for the 10-year Treasury note by an average of 3.5%, according to Lerner.

“If the (earnings) rebound is as strong as is anticipated, then that would bolster the case for stocks,” Lerner said. (Reporting by Kate Duguid and Lewis Krauskopf; Additional reporting by Karen Brettell; Editing by Ira Iosebashvili and Richard Pullin)

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Comments

  • tamkaize
    2021-02-19
    tamkaize
    Don't touch bonds. Investing in good companies with intrinsic value like Amazon or Google is much much much better. 
  • Ehyj
    2021-02-19
    Ehyj
    Oh nice.... 
  • ThangCT
    2021-02-19
    ThangCT
  • Mechanicss00
    2021-02-19
    Mechanicss00
    Please like my comment ?
  • Kok
    2021-02-19
    Kok
    Rising bond yields is only temporary
  • Ben0619
    2021-02-19
    Ben0619
    [微笑] [微笑] [微笑] [微笑] 
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