When do yields start to hurt equities?

It’s been a topic of conversion for years now: When will higher bond yields really start to take a bite out of equities?

Martin Roberge, portfolio strategist at Canaccord Genuity, thinks he has the answer: When they hit roughly three per cent on the U.S. 10-year Treasury.

That’s above the historical average, but the reason is that asset allocators require a higher-than-normal margin of safety in order to favour stocks over bonds this time around.

“Global policy rates are at the zero bound in developed markets and world central banks have little fire power left to face the next recession or financial crisis,” Roberge said in a research note.

Three per cent also happens to fall in line with investor be- haviour concerning the equity risk premium (equity returns above the risk-free rate), where the peak of the previous business cycle becomes the floor of the next.

Roberge’s bond yield outlook is based on his expectation for the level of real GDP growth for the U.S. economy in the coming year to be 2.25 to three per cent.

The strategist admits there is no way to be sure about where bond yields will be a year from now, but he believes three per cent could be the choking point for stocks.

“Importantly, this does not mean that the bull market stops at three per cent but that EPS growth will have to accelerate for stocks to march higher,” Roberge said.