Economics & Growth | Equities | Rates | US
Higher US Yields Are Good for Equities
- By Bilal Hafeez
- 1 min read
Many say that higher US bond yields will derail the US equity rally. Yet, US 10y yields have more than doubled to 1.24% today since their August 2020 low of 0.5%, while US equities have rallied 20% over that period. And these last six months are not unusual. Since the 2008 global financial crisis, changes in equities and bond yields are generally positively correlated (Chart 1). So, the norm is to see higher yields with higher equities and lower yields with lower equities.
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Many say that higher US bond yields will derail the US equity rally. Yet, US 10y yields have more than doubled to 1.24% today since their August 2020 low of 0.5%, while US equities have rallied 20% over that period. And these last six months are not unusual. Since the 2008 global financial crisis, changes in equities and bond yields are generally positively correlated (Chart 1). So, the norm is to see higher yields with higher equities and lower yields with lower equities.
This positive correlation suggests that what matters for equities is the nominal growth expectations side of rates markets. Higher yields mean greater nominal growth expectations, which is positive for equities. On the few occasions when the correlation between bond yields and equities flips, bond yields have reflected Fed tightening (Chart 1). So, episodes like the taper tantrum in 2013 or the Fed hiking cycle in 2018 both saw higher yields reflecting a tighter Fed, which in turn was expected to reduce growth.
Even looking further back, we find that the larger equity corrections of the dot-com period or the global financial crisis were associated with falling bond yields (Chart 2). Investors, then, should worry about falling, not rising, yields, especially if the Fed is not expected to tighten.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)