Bonds are Increasingly Driving the Stock Market

By Walter Kurtz, Sober Look

In recent months the US equity markets have become increasingly sensitive to movements in treasury yields.

BMO Capital Markets: – U.S. equity markets stumbled this week, with the S&P 500 sliding 2.1% and the Dow now skidding almost 4% from the record close set earlier this month. Most of the damage came on Thursday alongside a host of factors including disappointing July industrial production, downbeat corporate news from some Dow heavies and, perversely, a drop in jobless claims to the lowest level since 2007. The latter helped stoke expectations that Fed tapering is fast approaching, and pushed the 10-year Treasury yield above 2.8% for the first time in more than two years. Indeed, while not a big fan of the whole ‘good news is bad news’ refrain, it’s hard to ignore the recent inability of the equity market to absorb upward moves in bond yields.

In fact the correlation between the S&P500 and the 10yr treasury yield hit a new post-recession low (higher yields driving stock prices lower).

Equity-rate correlation


Not surprisingly, it was the high-dividend shares that have been most impacted by rising rates (higher rates decrease the present value of future dividends). After an impressive performance this spring, high dividend shares now lag the S&P500 by over 3% for the year (on average).

Dividend shares


Furthermore, if rates continue to rise, higher cost of borrowing will ultimately begin to eat into earnings – and will be immediately reflected in stock prices. At this stage the stock market in the US (and to some extent globally) is taking its lead from treasuries.


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • Vincent Cate

    Treasuries yields seem to be on a fast upward trend. I think we are getting a “bond panic”. The more bond prices go down the more people want to sell. If this is so, and interest rates keep going up, then within a month or two the market should crash.

  • Boston Larry

    Yields on treasuries and all other high grade bonds are rising at the fastest pace in more than 30 years. Historically, bonds and stocks do not fall at the same time unless we have a high and increasing inflation rate. That is not the case. My expectation is that during the next 3 months or so we will see one or both of the two markets turn up again. I am not at all sure which of the two will turn up more strongly. The contrarian surprise would be bonds turning stronger than stocks, in contrast to the first half of this year.