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In this article, we will introduce the relationship between treasury yield and stock performance.
A rapid rise in treasury yields can ripple through to stocks over short periods. But over the medium term (3-6 months), they were positively correlated most of the time.
What happened in both bond and stock markets?
The rise in U.S. Treasury yields has caused fluctuations in global stock markets recently. The $S&P 500 index(.SPX.US)$ briefly erased its 2021 gains, notching its lowest close in about five weeks. The Nasdaq 100 extended losses from a February peak to almost 10%.
The 10-year is used as a proxy for many other important financial matters, especially in bond market. The yield on 10-year Treasuries rose sharply to 1.56% during these days.
The 10-year is used as a proxy for many other important financial matters, especially in bond market. The yield on 10-year Treasuries rose sharply to 1.56% during these days.
Source: CNBC
Why did bond yield rocket so rapidly?
More often than not, Treasury yields move in tandem with U.S. GDP growth rate.
As economic growth improves, investors tend to shift from defensive assets (bonds) to risky assets (stocks) in pursuit of higher returns, resulting in higher bond yields.
Meanwhile, the U.S. Senate voted to take up a $1.9 trillion relief bill backed by President Joe Biden.
The rise in bond yields in recent months is a result of a combination of a better global economic outlook boosted by vaccinations and higher inflation expectations due to strength in oil and metal prices.
-CMBIS analysts
The relationship between treasury yield and stock market
Empirical evidence shows that stock prices have been positively correlated with bond yields. Stocks tended to rise when yields rose empirically.
However, there could be some divergence over short periods.
Higher discount rates in valuing stocks, particularly some growth companies valued using DCF model.
Higher borrowing costs may hurt economic growth and corporate earnings.
Reflecting higher inflations which translate to higher costs for certain industries and consumers.
During the taper tantrum in mid-2013, when the U.S. Treasury yields surged from 1.7% to 2.7% in the space of two months. The S&P 500 suffered a 5% correction in that period.
Therefore, a rapid rise in treasury yields can ripple through to stocks over short periods. But over the medium term (3-6 months), they were positively correlated most of the time.
Editor: Eric
Source: March Monthly Strategy of CMB International Securities
Comment(1)
thanks for the good summary
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