Why stock market investors should be closely watching bond yields  


Timing bear markets is never easy, but it’s even more so with fixed income.

When they do occur, they are often fairly quick in nature.

Both instances of sovereign bonds cheapening in 2018 have been characterized by such behavior.

In February, stock markets were roiled by the 40 basis point rise in 10-year U.S. yields . Yields have an inverse correlation to a bond’s price. This precipitated a stock market volatility shock and a big jump in the VIX index — which is used as a fear gauge with the broader market.

Interest rates on government debt have stabilized since then, even with the Federal Reserve hiking twice — which usually sends bond yields higher. From May onwards, 10-year U.S. Treasurys held on to a holding pattern of between 2.8 percent and 3 percent .

That’s all changed in the last month with the cumulative yield rise in September amounting to 45 basis points, the final 18 basis points occurring last week alone and putting the 10-year note at 3.25 percent, a level not seen since May 2011.

U.S. stock markets are beginning to take note as investors get nervous about the future returns of equities in a higher interest rate environment. Treasury yields are used to price the interest on all sorts of loans across the U.S. And if borrowing becomes more expensive then there’s a belief that some companies could start to be squeezed. Investors have therefore started to evaluate the merits of holding growth stocks in a late cycle environment.

There are certainly many reasons to be negative on fixed income at this juncture:

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