Rising bond yields won’t kill equities

While bond yields should continue to rise this year, they will not do so at a pace or to a level that could threaten returns from equities, according to JP Morgan’s latest Guide to the Markets – Australia.

Global market strategist at JP Morgan Asset Management Kerry Craig said that “higher rates are painful for equities but not lethal” as they are still sitting at too low a point to kill, which should reassure investors in that market.

“Bond yields should continue to rise through 2018 but at a gentler pace and are some way below the level that would suggest investors should rotate away from equities and into bond markets,” Craig said.

“Equity markets can absorb a slow pickup in yields, though not another sudden acceleration, as long as the earnings outlook remains strong and global nominal growth rates are high.”

The Guide reinforced that rising bond yields are not new, pointing to the US 10-year Treasury yield’s steady rise of 59 basis points between June, 2017 and January, this year, as evidence of this.

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It was not the rise but rather the aggression of February’s move that unnerved investors, JP Morgan said.

“In the near term, the pace of the move, rather than the magnitude, matters to equity markets.”

As the chart below illustrated, the historical relationship between low bond yields and positive US equity returns saw monetary policy supporting equities until yields reach five per cent. Above five per cent though, and equities start to suffer.

Craig said that current yield rates were still some way from hitting this point, meaning that equities should not be dismissed in light of bond movements.