Bond yields around the world are moving higher, encouraged by stronger economic activity, surging crude prices and speculation that major central banks will continue to unwind ultra-easy monetary policy settings that have been in place since the global financial crisis.
After a strong run for stocks over the past decade, helped in part by quantitative easing from the likes of the US Federal Reserve, Bank of Japan, European Central Bank and Bank of England, among others, which have suppressed borrowing costs, it’s little wonder that some investors are starting to get a little twitchy about what even higher bond yields could bring.
If stocks soared because bond yields fell, does that mean stocks will now fall because bond yields are rising?
In short, no, not unless the lift in bond yields is fast and large in scale.
This chart from HSBC’s Global Equity Strategy team underlines that point.
It shows the average change in global stocks over a given month to a move in global bond yields — either up or down.
Stocks, on average, tend to gain when bond yields fall, just as has been seen on most occasions in the post GFC-era.
And, when global bond yields rise by between zero to 50 basis points over a month, stocks also tend to increase by just under 1%, on average.
However, when global bond yields increase by 50 basis points or more over a given month, the story suddenly changes. Instead of increasing, stocks, on average, tend to fall by over 1%.
So unless the move higher in yields is abrupt, it tends not to ruffle the feathers of stock traders, says HSBC.
“History suggests that equities typically do well against a backdrop of rising yields, but not when the rise is very sharp,” HSBC says.
“From a sector perspective, short-duration sectors such as financials and industrials benefit most from rising yields. Utilities has the most negative sensitivity to bond yields.”