Bond Yields Are Spiking Higher. Should Stock Investors Worry?
Yahoo Finance ·
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? 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.
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Bond yields, including the 30-year and 10-year Treasuries, have recently surged, with the 30-year yield hitting a 19-year high. Historically, such sharp increases in bond yields have negatively impacted the stock market by increasing borrowing costs for consumers and companies, and making bonds more attractive than stocks.
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- Equity Market — The overall attractiveness of the stock market decreases relative to bonds, and corporate earnings may deteriorate due to increased funding costs and weakened consumer purchasing power.
- Growth Stocks — Higher discount rates reduce the present value of future earnings for growth stocks, and increased borrowing costs for new investments and expansion hinder growth.
- Real Estate — Rising mortgage rates increase housing purchase costs, leading to decreased housing demand and transaction volumes, potentially contracting the real estate market.
- Automotive — Rising car loan interest rates increase the burden on consumers for vehicle purchases, potentially leading to a decrease in car sales, which is negative for related companies' performance.
- Highly Leveraged Companies — Increased borrowing costs lead to higher interest burdens for highly leveraged companies, worsening profitability and raising concerns about financial health.
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