US Treasury bonds offer historically high yields. An analysis of the data shows: This could be an opportunity to enter the stock market - contrary to the concerns of many investors.
Stock and bull on the scales: For stock investors, the current market environment could be a reason to invest. Photo: GPT Image 2
Dusseldorf. At the end of September, the yield on ten-year US government bonds reached its highest level since 2007 at over 5.2 percent. Investors are therefore concerned about negative effects on the stock markets.
Because: If the interest rates on safe bonds are so high, they theoretically become more attractive compared to stocks, so that investors can reallocate accordingly. Share prices would fall accordingly.
But if you evaluate how the three US stock indices have reacted to high bond yields over the past 60 years, it becomes clear that in practice the connection is not as simple as in theory.
Specifically, the Handelsblatt analyzed how the three stock indices Dow Jones Industrial Average, S&P 500 and Nasdaq Composite have reacted to high yields on US government bonds since data collection began in 1962. On the one hand, it was examined how the prices developed after the returns had exceeded the four or five percent mark. On the other hand, what happened to stocks when yields rose by more than 100 basis points in half a year. Three lessons can be derived from this consideration.
Lesson one: The reaction of the stock market depends on other factors
The prices of the three indices examined have not developed clearly in the past after ten-year bond yields exceeded four or five percent. Instead, its price rose almost as often as it fell - especially in the short term.
“How stocks react to increased bond yields always depends on the overall market environment,” says Ulrich Urbahn, head of multi-asset strategy and alternative portfolio management at the Hamburg bank Berenberg.
What matters is why the returns are increasing. Whether weak auction demand is driving up rates or a strong economy causes different reactions for stocks. The financing conditions for companies and how market participants' portfolios are composed at the time of high returns also influence the indices.
An example from 2022 shows that monetary policy is also central at the time of the rise in yields: At that time, the start of the Russian war of aggression against Ukraine led to a global energy crisis, inflation rose significantly, and the US Federal Reserve responded with an aggressive interest rate turnaround. "Both stocks and bonds fell; it was one of the most problematic years in recent decades," says Mathias Beil, head of private banking at Sutor Bank.
We expect oil prices to fall to around $80 a barrel next year. Lutz Welge, Head of Asset Management at Julius Baer
Other factors are currently affecting US bonds. The US national debt is at a high of $40 trillion, which corresponds to 125 percent of annual economic output. In addition, the price of oil, which has risen sharply as a result of the Iran war, is increasing costs for industrial companies.
These two factors are offset by solid US economic growth. The International Monetary Fund predicts a GDP increase of around 2.4 percent for the USA in 2026. Companies' profits are also developing significantly better than expected.
The oil market could soon relax again. Before the Iran War broke out at the end of February, a barrel of oil cost $73; after the war began, the price rose to $119 within a few days. Lutz Welge, head of asset management at Bank Julius Baer Germany, expects "the price of oil to fall to around $80 a barrel next year, which should also be viewed positively by the stock market."
Lesson two: The market can adjust to the high returns
Since an increase in yields is often preceded by other events that influence the market, the stock markets have often already priced in the development of bonds.
This adjustment effect is particularly evident in 30-year US government bonds. Six months after their returns exceeded the four percent mark, the Dow Jones, S&P 500 and Nasdaq were each higher than at the time of the event in over 90 percent of cases. “The high number shows how resilient the stock markets are when the economic environment is right,” says Beil.
From a certain yield level, the probability that interest rates will fall again rather than continue to rise increases. “And that tends to support stocks,” says portfolio manager Urbahn. Investors then tend to rely less on bonds.
Lesson three: A rapid increase is more dangerous than a high return alone
Welge makes getting used to it dependent on another factor: "If the market hovers around the threshold and then looks over it, the stock market can anticipate that." If there is an abrupt jump, stocks are more likely to have problems.
The historical data also shows this. Handelsblatt examined how stocks reacted when 10-year bond yields rose by 100 basis points in six months - a pace widely considered dynamic.
The result: In over 85 percent of the cases, the loss rates of the combinations examined were higher than on all comparable trading days during the period. Such an increase occurred around 2022, when the markets expected higher interest rates in the wake of the energy crisis and there was a sell-off in US bonds.
“The stock market hates negative surprises,” says Welge. "The market then tries to quickly adjust to the new level, and that's how prices fall."
But even with rapid increases, the reason for the increase in returns is important. If rates rise due to a short-term development, such as higher oil prices, stocks usually recover more quickly than after a confidence or liquidity shock such as the 2008 financial crisis.
In the short term, what remains crucial is whether profit development can keep pace with the rise in yields. Thomas KulpAnalyst at DZ Bank
This difference can be made clear in the so-called Taper Tantrum from 2013. At that time, the US Federal Reserve suddenly announced that it would scale back its bond purchases because inflation was critically low. The yield on ten-year US government bonds then rose by around 100 basis points between May and the end of the year, and the S&P 500 initially lost six percent. By December, however, it had increased again by eleven percent.
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The stock markets have also coped well with the current increase of more than 100 basis points since March, even though it took place in such a short time. Thomas Kulp, analyst at DZ Bank, attributes this to the fact that companies' profit prospects have so far offset the negative effects of rising bond yields.
“In the short term, what remains crucial is whether profit development can keep pace with the rise in yields,” says Kulp. Falling oil prices, falling bond yields or convincing economic data could therefore support the stock markets. However, rising oil prices and higher bond yields could increase valuation pressure.
More: Solid companies, returns of more than four percent – new corporate bonds under review
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