of
10 year government bond yield
I’m heading up like a hiker climbing a mountain. And, like a hiker, the yield reaches a critical point – a level.
In 10 years, the next major level is 5%, but Wall Street definitely won’t celebrate this milestone. Stocks will take a hit.
The yield currently stands at just above 4.6%, almost a percentage point above February’s low of 3.8%. There are two factors contributing to the rise in interest rates. One is that inflation is higher than expected, and the other is that the Federal Reserve is not expected to lower short-term interest rates anytime soon.
The yield is 4.6%, certainly within 5% range. John Kolobos, chief technical strategist at Macro Risk Advisors, wrote that even a break above 4.7% would send a clear signal that the march is not over yet.
Yields rose twice in April to about 4.7%. Then, as too many buyers showed up, bond prices rose and yields fell, so they quickly fell.
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Yields will rise if sellers are at the forefront this time, pushing prices down and yields rising. A 5% yield is just around the corner.
For the stock market, that’s a problem.
At this point,
S&P500
It remains nearly 3% below its intraday high after surging on Friday. The reason it’s back up again after falling sharply a few weeks ago is that stock traders are pretty calm right now, meaning that a fall is likely unless the 10-year yield breaks above 4.7%. What I’m still thinking about has quite a bit of an influence on me.
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But be prepared. If the yield rises above 4.7%, there is a good chance Wall Street’s good moves will be undone and the stock price will fall.
Higher yields raise the cost of borrowing for consumers and businesses, making it more difficult to spend. As a result, economic growth may slow considerably and analysts may revise corporate earnings forecasts downward.
A related concern is stock valuation.
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Rising yields on government bonds are attractive to investors worried about soaring valuations.
Currently, the S&P 500 index trades at about 20 times analysts’ earnings estimates for the next 12 months, which means investors receive a 5% return for owning the index, compared to bonds. This means that the additional returns, if any, will be minimal.
Shareholders want a higher rate of return in return for the additional risk they bear. That’s why any meaningful uptick in 10 years should cause a downturn.
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Based on the correlation between the index and bond yields over the past few years, if yields rise above 4.7%, the S&P 500 should fall to 4,800 from its current level of about 5,100, Kolovos wrote. If the yield exceeds 5%, the S&P 500 index would fall 12% from current levels to around 4,500.
Pay attention to its yield.
Email Jacob Sonenshine at jacob.sonenshine@barrons.com.
