{"id":5890,"date":"2023-11-02T06:03:03","date_gmt":"2023-11-02T06:03:03","guid":{"rendered":"https:\/\/connectwithfund.com\/markets\/relax-heres-the-bright-side-of-higher-bond-yields\/"},"modified":"2023-11-02T06:03:04","modified_gmt":"2023-11-02T06:03:04","slug":"relax-heres-the-bright-side-of-higher-bond-yields","status":"publish","type":"post","link":"https:\/\/connectwithfund.com\/?p=5890","title":{"rendered":"Relax: Here\u2019s the Bright Side of Higher Bond Yields"},"content":{"rendered":"
\n
<\/p>\n

<\/p>\n

<\/p>\n<\/figure><\/div>\n

I\u2019m ruling out dressing for Halloween as a 10-year Treasury paying 5%. It\u2019s too scary, judging by Wall Street chatter over a recent climb in yields. Plus, I\u2019d have to explain to neighborhood CFAs that the paper certificate is just a metaphor, and that yes, I know that Treasury issuance has been almost entirely electronic for years. But mostly the too-scary part.<\/p>\n

The 10-year yield just hit 4.7%, up from 3.8% in mid-July and less than 1% for much of 2020. It\u2019s the highest yield since 2007. Both the Federal Reserve and China are selling Treasuries. And buyers are said to be suddenly worried about the U.S. debt, so they must be coaxed with ever-higher yields.\u00a0\u00a0<\/p>\n

\n

That could hamper stocks, say strategists at Goldman Sachs, Morgan Stanley, and J.P. Morgan. Savita Subramanian, the top stock strategist at BofA Securities, remains bullish. \u201dCompanies\u00a0have\u00a0time\u00a0to\u00a0sort\u00a0of\u00a0adapt\u00a0to this\u00a0new\u00a0higher-rate,\u00a0higher-inflation\u00a0environment,\u201d she says. More on that conversation in a moment.\u00a0<\/p>\n

Three quick points of emotional support for rattled investors: First, yields are higher, but not particularly high. Since 1962, the average daily 10-year Treasury yield was more than a point higher than now\u20145.9%, according to data from FRED, the Federal Reserve\u2019s economic data service. Since 1971, the average 30-year mortgage rate is 7.7%, versus a recent 7.3%.\u00a0<\/p>\n

Both averages are pulled higher by the anti-inflation crusade of the early 1980s, when mortgage rates topped 15%. But they\u2019re also pulled lower by a much longer period from the global financial crisis through early last year, when the Treasury at one point had to update its software to allow for negative-yield bidding on T-bill auctions. Monetary historians say long rates are bouncing back from a 5,000-year low. So who\u2019s to say what exactly is normal? But clearly, yields today are moving toward normal, not away from it.<\/p>\n

Second, that\u2019s good. Savers need respectable yields on bonds to properly diversify their assets. Otherwise they might buy nutty things, like cartoon ape faces, and then convince themselves that the cartoons are valuable, because they\u2019re NFTs, or nonfungible tokens\u2014engineered digital scarcity powered by the blockchain, which something-something the future of money or whatever. And before you know it, the New York Post<\/em> will publish the headline, \u201cNYC Man Sells Fart for $85, Cashing In On NFT Craze.\u201d Which happened. Less than three years ago.\u00a0<\/p>\n

Third, higher yields don\u2019t have to be painful for stock investors. From 1985 to 2005, inflation-adjusted bond yields were higher than now, on average, and stocks during that stretch returned 15% a year, according to BofA Securities. Subramanian, head of U.S. equity there, isn\u2019t overly concerned about recent stock market selling. She points out that 5% market pullbacks have happened three times a year on average in data going back to the 1920s. <\/p>\n

\u201cThe\u00a0idea\u00a0of\u00a0a\u00a0little\u00a0bit\u00a0of\u00a0steam\u00a0being\u00a0taken\u00a0out\u00a0of\u00a0this\u00a0Magnificent Seven\u00a0makes\u00a0sense\u00a0to\u00a0me,\u201d she says of recent declines in tech giants like
\n Apple
\n (ticker: AAPL),
\n Amazon.<\/span>
\n com (AMZN), and
\n Nvidia
\n (NVDA).<\/p>\n

Just as most U.S. mortgage holders have locked in low fixed rates, U.S. companies have bought time to respond to rising rates. <\/p>\n

\u201cFloating\u00a0rate\u00a0risk\u00a0has\u00a0been\u00a0cut\u00a0in\u00a0at\u00a0least\u00a0half\u00a0since\u00a02007,\u00a0and\u00a0close\u00a0to\u00a080% of\u00a0debt\u00a0sitting\u00a0on\u00a0corporate\u00a0balance\u00a0sheets\u00a0for\u00a0the\u00a0S&P 500\u00a0is\u00a0fixed\u00a0rate,\u201d says Subramanian. She points out that unlike fixed income, companies can respond to changing conditions. For example, they\u2019re using artificial intelligence and automation to become more efficient, which could help contain both their costs and broader labor inflation.\u00a0<\/p>\n

Barring a recession, mass layoffs, or a super spike in the oil price, the second quarter of this year is likely to mark the low point for S&P 500 earnings growth, with earnings gains picking up over the next one to two years, says Subramanian.<\/p>\n

\u201cI\u00a0think\u00a0the\u00a0next\u00a0story\u00a0for margins might not be cost cutting, or globalization or cheap capital,\u201d she says. \u201cBut\u00a0it\u00a0might\u00a0be\u00a0more\u00a0about\u00a0efficiency\u00a0gains\u00a0and stickier\u00a0operational\u00a0improvements.\u201d<\/p>\n

BofA\u2019s latest year-end
\n S&P 500
\n forecast is 4600, implying 9% upside from recent levels. We\u2019ll see.\u00a0<\/p>\n

The clearest call to action, it would seem, is for those investors who fled bonds for money markets, or worse, to return to a proper bond allocation. A 10-year inflation-adjusted Treasury recently yielded 2.3%\u2014no reason to ditch stocks, but probably better than an ape face.<\/p>\n

Corrections & Amplifications<\/strong><\/p>\n

The 10-year Treasury yield was less than 1% for much of 2020.\u00a0An earlier version of this article incorrectly gave the year as 2000.<\/p>\n

Write to Jack Hough at jack.hough@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

I\u2019m ruling out dressing for Halloween as a 10-year Treasury paying 5%. It\u2019s too scary, judging by Wall Street chatter over a recent climb in yields. Plus, I\u2019d have to explain to neighborhood CFAs that the paper certificate is just a metaphor, and that yes, I know that Treasury issuance has been almost entirely electronic for years. But mostly the too-scary part. The 10-year yield just hit 4.7%, up from 3.8% in mid-July and less than 1% for much of 2020. It\u2019s the highest yield since 2007. Both the Federal Reserve and China are selling Treasuries. And buyers are said<\/p>\n","protected":false},"author":1,"featured_media":5891,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[39],"tags":[],"class_list":["post-5890","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets"],"yoast_head":"\nRelax: Here\u2019s the Bright Side of Higher Bond Yields | ConnectWithFund<\/title>\n<meta name=\"description\" content=\"I\u2019m ruling out dressing for Halloween as a 10-year Treasury paying 5%. It\u2019s too scary, judging by Wall Street chatter over a recent climb in yields. 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