Bond Yields Are ‘Elephant In Room’ Stock Investors Are Ignoring
If professional investors are worried that the rise in global bond yields will derail a bull market in stocks, you’d never guess it by looking at what they’re doing with the money they manage.
Bank of America Corp.’s latest survey of global fund managers shows they have 56% of their portfolios in equities, the highest proportion since November 2021. The bullishness toward stocks comes even as the same survey shows that a “disorderly rise in bond yields” is considered the second-largest threat to the equity market after concerns about an AI bubble. In a related risk, 25% of respondents cited a second wave of inflation as the largest risk.
The jump in yields is the “elephant in the room” that threatens to derail an equity market that has had trouble staying near records after hitting them over the past year, Tyler Richey, editor of the Sevens Report Technicals newsletter, said by phone.
Yet while strategists up and down Wall Street are watching the rise in yields with some concern, they’re for the most part concluding that they haven’t climbed high enough to derail the bull case for stocks. After all, history shows that sudden spikes in yields aren’t always poison for the stock market.
“You should be bullish, or at least opportunistic here,” JC O’Hara, chief technical strategist at Roth Capital Partners LLC, said of the stock market sitting near record highs despite climbing yields. Risk appetites are improving on a combination of “stronger earnings expectations, better economic outlooks, and a lighter focus on Middle East tensions,” he said, adding that forward returns for the S&P 500 tend to be strong when risk appetite is improving.
For those who are concerned about the rise in yields, Wednesday offered some relief after the U.S. Treasury unexpectedly said it would ramp up buybacks of long-dated government debt in a move that sent the 10-year yield down six basis points to 4.65%. The 30-year yield, which earlier this week returned to the highest since 2007, slid 9 basis points to 5.19%. Rates on both were creeping back up early Thursday, however.
For other stock-market analysts, it’s the yield curve — or the difference between rates on short-term and long-term Treasuries — that’s worth watching. And the equity market is currently enjoying the “sweet spot” of the curve, Ed Clissold, chief U.S. strategist at Ned Davis Research, wrote in a note to clients on Tuesday. Currently, 10-year yields are about 49 basis points higher than two-year yields.
Clissold described a “modestly upward sloping yield curve,” in which the 10-year is as much 1.5 percentage points higher than the two-year, as providing some of the largest and most consistent gains for the S&P 500. In that range, the S&P 500 provides an average annual return of roughly 11%, according to an NDR analysis going back to 1976.
Of course, even current stock-market bulls concede that there is a point when rates may potentially start to bite the stock market if they keep rising.
“We’re OK around here, I think a move closer to 5% probably is the thing that would rattle the market, akin to what happened in 2023,” Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, said in a Bloomberg TV interview. The S&P 500 sank 10% from the end of July to late October that year amid a surge in the 10-year yield that made it briefly touch 5%.
Or as Matt Maley, chief market strategist at Miller Tabak + Co., said by phone: “Bond yields start to move higher and the equity market ignores it — until it doesn’t.”
This article was provided by Bloomberg News.
