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CHART: The relationship between a lift in US bond yields and the S&P 500

What a turnaround it’s been for financial markets following the election of Donald Trump, particularly for US treasuries and stocks.

From November 9 — the day the election was run and won by Trump in Asia — US 10-year treasury yields surged by over 90 basis points, hitting 2.64% in mid-December.

While they have subsequently fallen back to 2.39%, they still remain some 67 basis points higher than the low struck on that day.

Like treasuries, stocks have also had a wild ride, with the S&P 500 index currently up over 6% from the close of November 8.

One has driven the other, with the lift in yields benefiting stocks, particularly financials.

As this chart from Credit Suisse shows, that’s not all that unusual based on past events.

It shows the relationship between a lift in the US 10-year note yield over a three-month period and the subsequent reaction in the US S&P 500 index over the preceding three months.

While there are exceptions, it’s clear that a modest lift in yields had a tendency to drive the largest gains in stocks. However, if the move in yields is large, it has a tendency to result in far smaller gains for stocks.

That relationship is particularly relevant at present, especially as prominent analysts wade into the debate as to what level US bond yields need to reach in order to create problems for the stock market.

Is it 2.6%, or 3%, or higher? That’s the debate that has flared in recent days.

To Credit Suisse’s global equity strategy team, led by Andrew Garthwaite, they’re not at a level that will undermine stocks just yet, forecasting that the S&P 500 will rise to 2,350 by the middle of this year given an anticipated shift to expansionary fiscal policy under Donald Trump.

However, given the view that central bankers are more inclined to allow economies to run hot and rather risk inflation than deflation in its opinion, Credit Suisse says that there’s a risk that bond yields will rise too far, leading to a modest selloff in stocks in the second half of the year.

“Our global equity strategists forecast a moderate sell-off in 2H17, primarily due to the risk of bond yields rising too far,” it says.

“Rising bond yields may not become a headwind for equities until the US 10-year yield rises to 3.0-3.5%, which would reduce EPS and undermine both relative valuations and corporate buybacks.”

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