Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, USA, April 29, 2024.
Brendan Mcdermid | Reuters
Bond market volatility has kept stock investors on their toes for months, but when will rising yields cancel out the 2024 stock rally?
The answer is 5% Yield on 10-year government bondsaccordingly Goldman Sachs. In a new 19-page paper using market data since the 1980s, the Wall Street firm said when that threshold is reached, the correlation between bond yields and stocks becomes negative.
“While there is no ‘magic number,’ historically bond yields around 5% become a clear problem for stocks – this is the point at which the correlation with bond yields is no longer decisively positive,” a Goldman team wrote Strategists led by Peter Oppenheimer, chief global equity strategist.
The benchmark 10-year Treasury yield rose 5 basis points to 4.67% on Tuesday after data showed employee compensation costs rose more than expected at the start of the year. That was another danger signal of persistent inflation, which the market believes will keep the Federal Reserve on hold until later this year before it starts thinking about cutting interest rates. A basis point is equal to one hundredth of a percentage point.
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Goldman said investors are currently in the “optimism phase” of the cycle, where confidence – and complacency – is increasing, driving valuations higher.
“Equity valuations are higher and the cycle is more mature, so stock markets are very sensitive to movements in bond yields,” Goldman said. “They underperform when yields rise on news of overheating and higher inflation, while outperforming when the market confronts central banks with interest rate cuts.”
The 10-year Treasury yield, a key barometer for mortgage rates, auto loans and credit cards, has risen nearly 80 basis points this year as the market adjusts to a system of higher and longer-term interest rates. The current Federal Reserve Fed Funds interest rate for overnight loans is 5.25% to 5.50%.
After predicting at least six rate cuts earlier in the year, the market is now pricing in a 75 percent chance of just one rate cut, according to CME Group’s widely followed FedWatch tracker, which derives its probabilities from 30-day funds futures act. The central bank’s Federal Open Market Committee, which sets interest rates, began its two-day meeting on Tuesday.
Billionaire investor Warren Buffett has long emphasized the impact of interest rates on all investments, saying that higher interest rates exert a huge pull on the asset and reduce the present value of future earnings.
Rising yields reduce the attractiveness of risk assets, as shorter-dated Treasury bills and longer-dated Treasury bonds offer solid returns and a risk-free alternative to stocks.
—CNBC’s Michael Bloom contributed reporting.
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2024-04-30 18:30:59
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