Just in case you don’t think that bond yields matter to stocks, this chart, courtesy of Commsec, simply overlays Australia’s ASX 200 against Australian government bond yields.
Not a bad inverse relationship, and that’s putting it mildly.
That’s reflected in the movements seen today with yields up and stocks down once again.
As Craig James, chief economist at Commsec notes, the rush to yield could become a rush to the exits should bond yields continue to increase.
“The Australian sharemarket is exposed to higher bond yields because a high proportion of investor returns are provided by dividends as opposed to increases in share prices. As a result yield-hungry investors may seek to trim some exposures in the sharemarket, especially utilities and banks, to chase higher yields in fixed asset markets,” he says.
James’ also says that the ASX 200’s price-earnings ratio has been “holding above long-term averages, suggesting that the market has been relatively dear rather than cheap”.
“The historic PE was 16.65 in September, above the 15.0-15.5 long-term average.”