A Rise in U.S Bond Yields

Is rising bond yields bad news for the equity markets?

Bond yields are an important indicator to gauge the direction of equities. They have an inverse relationship which explains why the stocks markets were in a sea of red when the US 10 -Yr Treasury yields soared to multi-year highs on Wednesday. The catalysts behind the surge in yields are mainly the strong US data, a hawkish Fed and receding trade wars.

This week marks the first week of a new quarter, and a “Yield Story” emerged. The threat of an inverted yield curve is overturned. The economic data shows that the US economy is still strong and continue to attract investors into riskier assets. The ADP employment data is showing signs that the labour market is near full employment and investors are starting to reflect on whether wage inflation will force the Fed to be more aggressive towards hiking interest rate.

Fears of higher interest rate mean higher cost of capital which could spark a sell-off. However, the latest corporate earning season was robust proving that companies can handle a higher rate environment.

What matters, and is making investors rethink their positions, is the pace of the increase in bond yields. It is worth monitoring the speed of the rising yields before dumping stocks. A robust economy and good earning outlook show that the US stocks markets have potential and much optimism.

However, the lift in the US yields also echoed across other major bond markets. A stronger US dollar and high bond yields do not usually go well with the emerging markets which can result into a fall in their stocks and currencies.

Yields could be the challenge for this quarter! The pace of the Rising yields in such a short span of time is what needs to be monitored!