Rising treasury yields have contributed to a high stock market pandemic sale, but they probably won’t be enough to ruin the stock’s attractiveness on bonds in 2021, according to one analyst.
U.S. capital investors “focused on the recent 10-year Treasury yield growth in the last week, which returns to mid-February 2020 levels,” wrote Lori Calvasina, head of US equity strategy at RBC Capital Markets, in a note on Tuesday. Bond yields and prices are inversely related.
10-year treasury yield TMUBMUSD10Y,
comes from the biggest rise in six weeks, which has been accused of causing a technology-driven stock-driven pullback that has benefited the most from the dynamics of home stay created by the COVID-19 pandemic.
Related: Can the stock market survive the rise in inflation, bond yields? Here’s what history has to say
The relationship was reversed on Tuesday, as yields yielded on the testimony of Federal Reserve Chairman Jerome Powell, allowing major benchmarks to erase or reduce significant losses. Nasdaq Composite COMP
which led the way down, reduced a loss of almost 4% to end with 0.5% as yields fell; S&P 500 SPX,
gained a gain to gain a five-day loss, while the Dow Jones Industrial Average DJIA, more cyclically oriented,
cleared a loss of over 360 points to finish a little higher.
Meanwhile, Calvasina said that a look at the stock offer in terms of dividends and the return on earnings relative to bonds, as well as a reminder of the type of bond movements that have caused problems for stocks, offers some assurance that 2021 is little probably turn into a year down, she said.
Dividend yield
When it comes to dividend yields, RBC has measured the percentage of companies that continue to outperform the 10-year treasury yield. Although this fell to 51.5% from 64% at the beginning of the year, it is still in a range usually followed by a 17% gain for the S&P 500 over the next 12 months, she said.
Earnings return
The earnings performance of the S&P 500 also deteriorated to the bottom of the range since the end of the financial crisis. It is now close to the level observed in 2017-18, but remains within a range followed by average gains of 9.3% of the S&P 500 in the next 12 months, Calvasina said.
“In other words, this analysis recognizes the case of a short-term withdrawal in the S&P 500, but it does not necessarily mean that long-term investors should head for the exit,” she wrote.
Calvasina also pointed out a “significant difference” between 2018, when the trade war posed a threat to the US and global economies and now, when gross domestic product forecasts are growing rapidly.
Treasury yields and inventories
Finally, what happens to the increase in treasury? After all, many market observers have argued that while yields remain low by historical standards, the size of growth may be the most worrying for equities. Calvasina decomposed the relationship between yield movements and stock market performance in the chart below:
RBC capital markets
Calvasina said US equities tended to struggle when the 10-year yield rose by more than 275 basis points, or 2.75 percentage points. Coming from its 0.51% low, a move of 275 basis points would bring the yield to about 3.26%. The 10 years ended on Tuesday at 1.363%.