Bond Yields Are Spiking Higher. Should Stock Investors Worry?
Bond yields have moved sharply higher in recent weeks. The yield on the 30-year Treasury hit a 19-year high this week. And the 10-year Treasury yield, which is the basis for consumer borrowing rates on mortgages and car loans, among other types of loans, climbed from 4.03% on March 3 to 4.69% last week before easing slightly to around 4.5% this week.
Such sharp, rapid increases in bond yields historically have been trouble for the stock market. Will they be this time?
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There’s lots of research on how bond yields impact stocks. Most of it centers on how higher interest rates make it more difficult for consumers to finance purchases, which negatively impacts companies’ revenues. In addition, higher interest costs directly subtract from companies’ earnings.
Also, higher bond yields make bonds more attractive relative to riskier stocks, which puts additional pressure on share prices.
Yet research by Goldman Sachs found that elevated bond yields themselves don’t have a huge impact on stocks. It’s when yields spike suddenly, about a half percentage point in a month, that short-term S&P 500 returns turn negative.
Goldman says that’s suddenly a risk. “There is a growing risk that rising bond yields, along with a slowing economy or inflationary pressures, could trigger a stock market correction,” according to a research note the investment bank put out last week.
It will be critical for investors to watch measures of inflation
While yields have surged, they’re still slightly below the threshold where they begin to weigh on stocks. A further increase in inflation could push them above that level, however.
That’s because bond investors are selling bonds in reaction to surging inflation, which rose to 3.8% year over year in April, the highest inflation rate since May 2023, and what they see as the Federal Reserve’s inappropriate response to it (i.e., instead of having a bias toward lower rates in the future, the Fed should be thinking about raising its target rate to combat rising inflation).
So, it will be critical to watch inflation measures in the coming weeks. The first of those comes on Thursday morning when the Commerce Department will release the Personal Consumption Expenditures Price Index. That index, which is the Fed’s preferred measure of inflation, increased 3.5% in March, and 3.2% with volatile food and energy prices stripped out. Both are far above the Fed’s 2% target for inflation.
