The spike higher in U.S. Treasury yields is unnerving investors, who are watching for the moment when the rise will start to hurt stocks. Higher bond yields can pressure equities for several reasons. Investors can get a higher rate of return from bonds without taking on the risk in the equity market. They can also lower the future profits of companies in today’s dollars — especially growth companies. But, even with yields at multi-decade highs, stocks have yet to take a meaningful hit. The yield on the 10-year U.S. Treasury yield — which is the key benchmark for mortgages — was last above 5.21%. The 30-year Treasury yield was also above 5.5%. Yet the S & P 500 remains just 1.4% below an intraday record of 7,816.70 reached Aug. 13. If history is any indication, stocks should be able to withstand even higher yields. Data compiled by Bank of America suggests that the 10-year yield will have to approach 7% to meaningfully hurt stocks. Going back to 1986, S & P 500 forward price-to-earnings multiples remained relatively stable around 16 when the 10-year yield trades between zero and 7%, the bank found. However, the multiple drops to a median 12.1, once the yield goes above 7%. The 10-year Treasury yield last closed with a 7-handle back on July 8, 1996 — at 7.06%. In her base case, BofA rates strategist Meghan Swiber doesn’t see the 10-year yield rising to 7%. However, she thinks expectations of higher interest rates from the Federal Reserve, in addition to robust growth and higher inflation, will continue add pressure to the bond market. “We continue to see higher rates ahead,” she wrote. “While supply-demand dynamics may add pressure, we do not see rates as restrictive enough yet to halt the move.” The firm said it remains short 2-year rates and recommends staying underweight duration.
