Will higher bond yields sink equities?

US flag and Capitol building — US government borrowing is increasing the supply of bonds and lowering their prices

(Image credit: © Getty Images/iStockphotos)

The arrival of the pandemic last spring sent investors flooding into the traditional safe haven of government bonds. That sent bond yields, which move inversely to prices, plummeting. By August the US ten-year Treasury was yielding just 0.5%.

Positive vaccine news means bond yields have been ticking back up since the autumn, especially in America. Investors are selling out of government debt instruments to buy into growth opportunities in other asset classes. Rising inflation expectations also mean bond investors demand higher yields as protection against the risk that their income stream is inflated away. Finally, massive US government borrowing increases the supply of bonds in the market, which lowers their prices and raises yields. The 30-year US Treasury bond is back above 2% for the first time since Covid-19 began, says Alexandra Scaggs for Barron’s. The benchmark US ten-year note is now above 1.2%. Rising yields pose a challenge to the equity bull market. They could tempt investors away from shares. Savita Subramanian of Bank of America says 70% of S&P 500 firms pay a higher dividend than the ten-year Treasury at present. That proportion would fall to 40% if the ten-year yield climbs to 1.75%, which could prompt a rush out of stocks.

Investors have long complained that poor bond yields force them into stocks in search of an above-inflation return, says Katie Greifeld on Bloomberg. Yet a recovery this year will raise pressure on the Federal Reserve to end its asset purchase programme and could even lead to talk of interest rate hikes, which will send bond yields higher. The days of Tina – “there is no alternative”– to buying stocks may be drawing to a close.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Explore More

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.