Take the impact of rising yields in perspective

The outlook for earnings remains upbeat today and henceforth, we are of the view that this is not the start of a bear trend
Chief Investment Office25 Apr 2018
  • The transition through stages of paranoia and fear in financial markets continues
  • But be reminded that yields are rising predominantly on the strengthening economy
  • The trajectory of UST yields has had a non-lasting impact on US equities
Photo credit: AFP Photo

The transition through stages of paranoia and fear in financial markets continues. The S&P 500 Index fell 1.34% to 2,634.56 overnight, as the 10-year US Treasury yield hit the 3% mark, raising concerns that the rising cost of capital will weigh on corporate earnings and equity valuations. These concerns are not without merit. The recent spike in bond yields was in part triggered by rising crude oil and base metals prices. But one should be more discerning here: A bigger factor driving yields higher is the fact that the US Federal Reserve is upbeat on the economy, and markets are expecting the central bank to hike rates at a faster clip.

Rising rates, especially coming from such a low base, should not materially impact the macroeconomic outlook and corporate profitability. To take a step back, recall the “Taper Tantrum” episode of May-2013. Then, the US 10-year yield surged from 2.0% to hit 2.99% by September, before embarking on a broad retracement. Even so, throughout this episode, the S&P 500 continued to grind higher, as seen from Figure 1.

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