The surge in yields on Treasuries has contributed to a massive sell off by the stock market pandemic high-thieves, but is unlikely to be enough to spoil the attractiveness of stocks versus bonds in 2021, according to an analyst.
Investors in US equities “focused on the recent increase in 10-year Treasury bill yields over the past week, which have returned to levels of mid-February 2020,” wrote Lori Calvasina, head of the US equity strategy at RBC Capital Markets in a Tuesday note. Bond yields and prices have an inverse relationship.
The 10-year Treasury yield TMUBMUSD10Y,
is experiencing its biggest rise in six weeks, which has been accused of triggering a pullback led by tech-driven actions that had benefited the most from the stay-at-home momentum created by the COVID pandemic. 19.
Related: Can the bull market in stocks survive rising inflation and bond yields? Here’s what the story says
The relationship went upside down on Tuesday as the rise in yields eased following testimony from Federal Reserve Chairman Jerome Powell, allowing major benchmarks to wipe out or reduce significant losses . The Nasdaq Composite COMP, at the cutting edge of technology,
which paved the way for the downside, cut a loss of almost 4% to finish down 0.5% when yields fell; the S&P 500 SPX,
eked a gain to break a five-day losing streak, while the more cyclically-oriented Dow Jones Industrial Average DJIA
cleared a loss of over 360 points to finish slightly higher.
Meanwhile, Calvasina said a review of what stocks offer in terms of dividend and yield versus bonds, as well as a reminder of the kind of bond moves that have caused problems for stocks, offers some insight. some assurance that 2021 is unlikely to turn into a year-round, she said.
Dividend yield
In terms of dividend yield, RBC has measured the percentage of companies that continue to outperform the yield on 10-year treasury bills. While that percentage fell to 51.5% from 64% at the start of the year, it still sits within a range typically followed by a 17% gain for the S&P 500 over the next 12 months, a- she declared.
Profit return
The S&P 500 earnings performance also deteriorated, moving down the range in place since the end of the financial crisis. It now sits near the level seen in 2017-’18, but remains within a range that has been followed by the S&P 500’s average 9.3% gains over the next 12 months, Calvasina said.
“In other words, this analysis recognizes the case of a short-term pullback in the S&P 500, but doesn’t necessarily signal that long-term investors should be heading for the exit,” she wrote.
Calvasina also highlighted a “significant difference” between 2018, when the trade war threatened the US and global economies, and now, when gross domestic product forecasts are rising rapidly.
Treasury yields and stocks
Finally, what about rising Treasury yields itself? After all, many market watchers have argued that while returns remain low by historical standards, it is the size of the rise that may be of most concern for stocks. Calvasina has broken down the relationship between yield movements and stock market performance in the chart below:
RBC Capital Markets
Calvasina said US stocks tended to struggle when the 10-year yield rose more than 275 basis points, or 2.75 percentage points. Coming out of its 0.51% low, a move of 275 basis points would take the yield to around 3.26%. The 10-year ended Tuesday at 1.363%.
The surge in yields on Treasuries has contributed to a massive sell off by the stock market pandemic high-thieves, but is unlikely to be enough to spoil the attractiveness of stocks versus bonds in 2021, according to an analyst.
Investors in US equities “focused on the recent increase in 10-year Treasury bill yields over the past week, which have returned to levels of mid-February 2020,” wrote Lori Calvasina, head of the US equity strategy at RBC Capital Markets in a Tuesday note. Bond yields and prices have an inverse relationship.
The 10-year Treasury yield TMUBMUSD10Y,
is experiencing its biggest rise in six weeks, which has been accused of triggering a pullback led by tech-driven actions that had benefited the most from the stay-at-home momentum created by the COVID pandemic. 19.
Related: Can the bull market in stocks survive rising inflation and bond yields? Here’s what the story says
The relationship went upside down on Tuesday as the rise in yields eased following testimony from Federal Reserve Chairman Jerome Powell, allowing major benchmarks to wipe out or reduce significant losses . The Nasdaq Composite COMP, at the cutting edge of technology,
which paved the way for the downside, cut a loss of almost 4% to finish down 0.5% when yields fell; the S&P 500 SPX,
eked a gain to break a five-day losing streak, while the more cyclically-oriented Dow Jones Industrial Average DJIA
cleared a loss of over 360 points to finish slightly higher.
Meanwhile, Calvasina said a review of what stocks offer in terms of dividend and yield versus bonds, as well as a reminder of the kind of bond moves that have caused problems for stocks, offers some insight. some assurance that 2021 is unlikely to turn into a year-round, she said.
Dividend yield
In terms of dividend yield, RBC has measured the percentage of companies that continue to outperform the yield on 10-year treasury bills. While that percentage fell to 51.5% from 64% at the start of the year, it still sits within a range typically followed by a 17% gain for the S&P 500 over the next 12 months, a- she declared.
Profit return
The S&P 500 earnings performance also deteriorated, moving down the range in place since the end of the financial crisis. It now sits near the level seen in 2017-’18, but remains within a range that has been followed by the S&P 500’s average 9.3% gains over the next 12 months, Calvasina said.
“In other words, this analysis recognizes the case of a short-term pullback in the S&P 500, but doesn’t necessarily signal that long-term investors should be heading for the exit,” she wrote.
Calvasina also highlighted a “significant difference” between 2018, when the trade war threatened the US and global economies, and now, when gross domestic product forecasts are rising rapidly.
Treasury yields and stocks
Finally, what about rising Treasury yields itself? After all, many market watchers have argued that while returns remain low by historical standards, it is the size of the rise that may be of most concern for stocks. Calvasina has broken down the relationship between yield movements and stock market performance in the chart below:
RBC Capital Markets
Calvasina said US stocks tended to struggle when the 10-year yield rose more than 275 basis points, or 2.75 percentage points. Coming out of its 0.51% low, a move of 275 basis points would take the yield to around 3.26%. The 10-year ended Tuesday at 1.363%.
