Rising Treasury yields are prompting investors to look for lessons in the past to see how and where further rate rises could hit financial markets.
Rising borrowing rates are easily one of the key factors that can ripple through markets and disrupt the bullish rally in equities that has been underpinned by COVID fiscal spending and monetary policy that has held at or near 0%.
A steep jump in yields over the past few weeks has raised the specter of a possible 2013-style ‘taper tantrum,’ one of the more notable and most recent occasions when the prospects of rising rates rattled the broader market.
Back then, former Fed Chairman Ben Bernanke hinted at tapering the Fed’s asset purchases, sparking a protracted and fierce Treasury-market selloff. Over a span of five months, the 10-year note yield TMUBMUSD10Y, 1.344% rose to 3% from 1.5% as bond prices fell and yields commensurately clambered higher.
Drawing parallels and lessons from that period seven years ago, strategists say there are parts of the market that may be particularly sensitive to further pressure if bond yields continue to rise.
At a time when stocks are trading near record highs. The theory goes that rising rates diminishes the value of a stock’s dividends or discounts future profits to an investor.
For equities that hold their allure thanks to the potential for high earnings growth, the rise in bond yields could be particularly devastating.
Indeed, the tech-heavy Nasdaq Composite COMP, -1.59% has led the market’s losses in the past few days, falling around 3% from its recent closing peak of 14,095.47.
And there could be further room to fall, experts say gauged by the by the 7.5% tumble for the S&P 500 SPX, -0.52% in the summer of 2013 from its peak.
ING strategists noted, however, stock-market investors may not necessarily find 2013 equity drawdown as a cause for concern as it “proved barely a blip in the long-term equity bull-market and there is no reason to think that any bond tantrum-induced equity correction this summer would be more than that, just a correction.”
Investors have become more sensitive to rate moves because of the shift by corporate treasurers to longer-dated debt to take advantage of the prevalence of ultralow rates.
That is because longer-dated bonds are more vulnerable to rate moves than their shorter-dated counterparts.
BofA Global Research has warned higher yields had the potential to hammer the investment-grade corporate bond market, where issuers have used their favorable credit ratings to lock in lower borrowing costs for an extended time.
History has shown the potential pain faced by bond fund managers. At one time, the credit indexes for investment-grade debt widened by 30 points in 2013, an indication of steep losses.
Yet limiting the risk of a corporate bond selloff, the supply of new debt onto the market is forecast to shrink this year, leaving investors to compete for a smaller pool of assets and bidding their values higher, said ING.
In theory, expectations of reflation, the driver of higher bond yields, would benefit demand for inflation hedges like gold.
But elevated bond yields, and more important, inflation-adjusted rates, can also sap the relative attractiveness of the precious metal, drawing investors away from gold back into government debt.
After the 10-year note yield rose nearly 15 basis points last week, gold futures GC00, +1.87% fell 2.5% over the same stretch, leaving the precious metal down double-digits from its August all-time high.