Last week, U.S. Treasury bond yields, climbed back to their pre-pandemic levels. In Europe, German 10-year yields climbed to near 0%, touching their highest level since May 2019. What are the implications of rising global yields for stock prices? Increasing yields could help lift stocks and may even signal outperformance of cyclical European stocks and value stocks.
The end of an era?
Interest rates and stocks have moved together for the past 20 years, but this hasn’t always been the case. In the prior multi-decade period, from the 1970s into the 1990s, when interest rates went up, stocks generally fell.
Changing relationship between stock prices and bond yields
The relationship between bond yields and stocks prices has changed over time. So, how can we tell if the current era may be ending? Well, the ten-year U.S. Treasury yield remains well below 5% and historically, that has been the threshold for a change in the relationship.
- Same direction - When rates were below 5%, both in the 1960s and since 2000, stock prices and bond yields tended to move in sync with each other (a positive correlation).
- Opposite directions -When rates were above 5% in the 1970-90s, stock prices and bond yields tended to move in opposite directions (a negative correlation).
The only exception to this was the period around the 1987 stock market crash, when stocks and yields moved together. However, these circumstances were unique; the market decline was not precipitated by an economic recession-driven drop in bond yields.