Rising Bond Yields
Yields have risen significantly over the past month, which temporarily dampened investors’ enthusiasm for stocks. As a result, equity markets saw some of their largest losses of the year. So what does this mean for future equity returns? All else equal, higher bond yields should have a negative impact on stock prices. The rationale is fairly straightforward.
Rising yields are bad for current owners of bonds, but are good for future bond owners. A bond with a yield of 6% is more attractive than a bond with a yield of 5%. The increased attractiveness of fixed-income securities should increase the demand for bonds and reduce the demand for stocks. With that said, the recent 50 basis point increase in yields should not have a dramatic effect on stock prices.
At this point, I would not be overly concerned about the run up in yields until they present stronger competition for stocks. This situation, however, should be monitored fairly closely, as there is a negative correlation between bond yields and stock prices.