Bond yield spike spooks stock bulls

Many Wall Street pros are blaming the stock market’s recent sell-off on the bond market. The reason: Yields on long-term U.S. government bonds have risen to four-year highs as economic growth and inflation pick up.

Rising rates are viewed as a headwind for stocks. Why? Because it results in higher borrowing costs, slows growth, makes bonds a more attractive investment alternative compared to stocks and makes today’s corporate earnings less valuable in the future.

Since the bond scare began about a week ago and the 10-year Treasury yield hit a four-year high of 2.88%, the Dow Jones industrial average has tumbled as much as 10.7% from its Jan. 26 high and has behaved erratically.

What’s odd, however, is while rising rates are viewed as the enemy of stocks, history suggests that higher long-term bond yields don’t have to be a threat to stocks, Don Luskin, chief investment officer at TrendMacro, noted in a report.

His data show “higher yields and superior equity returns have generally gone hand-in-hand.” Rising bond yields, he notes, are a sign of economic strength. In the past 21 episodes since 1945 when the 30-year U.S. bond yield has suffered “significant” spikes, stock prices have only declined in three of those periods.

“Stocks have rallied in the other 18 periods, with generally better-than-average returns,” he says.

While those past performance stats might not make investors feel any better as the Dow swings wildly on a daily basis, the data show stocks can go up at the same time rates are moving higher.