Rising Yields’ Positive Effect for Equities
Empirical studies suggest that an increase in the Treasury yields does not necessarily lead to weaker equity performance. When yields on the 10-year note remain below 4%, the correlation between S&P 500 monthly returns and changes in 10-year yields are positive, which implies that when yields rise, equity prices move higher as well. An increase in interest rates from a low level is likely to be the result of more robust economic activity, which is positive for equity performance. When the 10-year Treasury yield climbs above 6%, the correlation inverts, with increasing yields leading to decreasing equity prices. This occurs because of the affiliated rise in the inflation premium, which is negative for input prices and earnings, putting downward pressure on equity prices. Given that the 10-year Treasury yield is currently around 1.83%, for now, any potential rise in yields should result in an increase in equity prices.
U.S. TREASURY YIELDS VS. THE ROLLING CORRELATION BETWEEN S&P 500 RETURNS AND CHANGES IN 10-YEAR YIELDS (1962 – PRESENT)