Yingwei Caiqing Investing.com – The S&P 500 index fell for three consecutive trading days, accompanied by the recent surge in the yield of the US 10-year treasury bonds. A week ago, the yield was only 1.1%. By this Thursday, it had risen to 1.31%, the highest level since the end of February last year.
The question now is, will the yield rise? If so, do US equity investors need to be worried? What is the threshold for stock selling?
The yield trend of US 10-year treasury bonds
Will US bond yields continue to rise?
So far, the trend of yield is in line with Wall Street's expectations.
Behind the rise in yields, to a large extent, it is due to concerns about inflation pressure. Inflation will erode the value of fixed interest paid by bonds, thus reducing the attractiveness of such assets, depressing bond prices and pushing up yields.
Although the minutes of the Federal Reserve's meeting in January showed that policy makers were not troubled by inflation risks, recent economic data has fuelled the market's anxiety: last month, US retail sales jumped 5.3%, the producer price index rose 1.3%, and the monthly rate of industrial output reached 0.9%.
In addition, with the approaching of mid March (when 11.4 million workers are expected to lose unemployment benefits), the Biden government is under pressure to quickly pass the 1.9 trillion dollar epidemic assistance plan. The House of Representatives plans to pass the bill before next Friday and submit it to the Senate for voting.
Nomura Securities believes that if the market unanimously believes that the global economy is on the right track of recovery, CTA (Commodity Trading Advisory Fund) may further short US bond futures, pushing the yield of US 10-year treasury bonds up to more than 1.5%.
Looking across Wall Street, most people expect that by the end of this year, the yield of US 10-year treasury bonds will reach nearly 2%.
How will the rise in yield affect stocks?
First, it may weaken the attractiveness of US stocks relative to US bonds, a safe haven asset. Especially for growth stocks such as technology companies, because investors attach more importance to the expected returns of growth stocks, and the rise in the yield will erode the value of these companies' future cash flows, their valuations are more likely to suffer a correction.
Judging from the trend of US bonds and US stocks in recent days, the rising yield is really not conducive to US stocks. However, JPMorgan Chase believes that "the reason behind the rise in yield" is the key to the problem rather than the rise in yield itself. If the yield rises because of "positive factors" such as the increase of GDP expectations, then the US stock market will not be exposed to risks; However, if it is due to some "negative factors", such as insufficient demand for US debt, then US stocks may be under pressure.
Of course, JPMorgan Chase also believes that, whatever the reason, the yield will eventually depress the valuation of American stocks. Technology stocks will bear the brunt, while cyclical stocks will continue to rise.
Do US equity investors need to worry now?
Nomura predicted that if the yield of the 10-year US treasury bond remained between 1.3% and 1.4%, the US stock market might only experience a moderate correction; However, if the yield exceeds 1.5% as mentioned above, the S&P 500 index may undergo a more drastic correction, with a downward adjustment of 8% or more.
Therefore, "there is no need to worry about the downward impact of rising US bond yields on stock prices," said Nomura analysts.
Similarly, Truist Advisory Services also pointed out that stocks are still more popular from the perspective of stock risk premium (the difference between stock return and risk-free return). When the stock risk premium was at Tuesday's level, the annual return of the S&P 500 index was 3.5% higher than the yield of the 10-year US treasury bond on average according to previous data.
Like Nomura, Jeffery Group also believes that 1.5% is a key value; Citigroup set the critical point at 1.7%.
The analysts of JPMorgan Chase pointed out that only when the yield of the 10-year treasury bond of the United States reaches 2% can American stocks begin to lose their attractiveness. Analysts at the bank expect the yield to be around 1.45% by the end of this year.
Although in the medium and long term, the rise of US bond yield is a trend, according to strategists, it is unlikely that the yield will continue to rise, because once it rises to a sufficient level, global investors may intervene. For example, after the yield of US bonds reached 1.3% on Tuesday, investors in Japan and other Asian markets bought them, reducing the selling pressure of US bonds in the next trading session.