Do bond yield increases trigger stock market pullbacks?

[stevenpaul]

Commentators are always attributing the recent pullbacks in equities to spikes in fixed income yields. I have to say, I find this correlation hard to believe. Is there anyone here who is also skeptical of this hypothesis, that stock prices and bond yields must move in opposite directions? More to the point, should stocks benchmarks pull back by 2% today just because the 10-year yield increases by 9 basis points? The moves in stocks are more extreme than the moves in bonds the supposedly trigger them.

I just can't believe that a relatively small move in bond yields would precipitate such extreme selling equities.

And if so, why?

I understand that the theory goes: Traders sell bonds, for whatever their reason. Such selling creates higher yields, which then makes for stiffer competition with the stock market. Traders see that the risk-free yield of bonds is higher and more tempting than before, and accordingly sell off stocks with the intention of buying bonds instead. They risk less by buying bonds rather than stocks, yet lock in on an attractive yield.

But the only reason yields go up is because people are selling bonds. If the bond market is crashing, why would traders sell stocks to buy bonds? Wouldn't they avoid bonds? Sure, bond yields are high, but that's only people are hating bonds now. That's why I can't believe in this view that the sell-off in stocks is driven by greed for higher yields in the bond market. Why sell quality stock investment opportunities in favor of a losing bond market?

 

[murray t turtle]

%%
I'M mostly like you, in that stocks /ETFs are correlated to itself LOL
Maybe in some cases.I used to see a RE appraiser post junk like ''oil going up so stocks go down LOL '' Maybe a grain of truth there, State Farm mutual fund data = opinion low gas prices may have more money to invest. I never check the price of oil before i buy stocks, may do it if oil ETF\ LOL
Talking snake media ; i seldom believe most anything they say.[NPR, CNN among the worst]
IF fixed income[not exactly fixed in many cases] gets in hi teens% LOL did once, may do some more LOL/ but that not an auto sell stocks

 

[SunTrader]

Commentators are always attributing the recent pullbacks in equities to spikes in fixed income yields. I have to say, I find this correlation hard to believe. Is there anyone here who is also skeptical of this hypothesis, that stock prices and bond yields must move in opposite directions? More to the point, should stocks benchmarks pull back by 2% today just because the 10-year yield increases by 9 basis points?

Mixing apples and oranges.

2% and 9 basis points.

TradeStation shows $TNX up Monday's close 2.54% and ES down -1.55%

Although $TNX is up 1.372% from todays open.

 

[Ayn Rand]

There is not a direct relationship between interest rates and stocks. But aspects to consider - Many stocks are held for their dividend payout. Higher rates make these stocks look less attractive. If you hold stock on margin the cost to carry is higher with higher interest rates. A lot of companies are holding interest rate sensitive assets at an unrealize loss. The later is the most worrisome. Several new members to The Fed's BOG lack. All they can vaguely understand is raise interest rates and inflation will eventually come down. There are a plethora of secondary consequences that apparently were just not considered.

 

[SunTrader]

Everyone it seems was well aware of QE I, II, II and Twist (well maybe not that last one) but it's like have all forgotten about the inverse - QT (red line) :-

 

[maxinger]

Commentators are always attributing the recent pullbacks in equities to spikes in fixed income yields. I have to say, I find this correlation hard to believe. Is there anyone here who is also skeptical of this hypothesis, that stock prices and bond yields must move in opposite directions? More to the point, should stocks benchmarks pull back by 2% today just because the 10-year yield increases by 9 basis points? The moves in stocks are more extreme than the moves in bonds the supposedly trigger them.

I just can't believe that a relatively small move in bond yields would precipitate such extreme selling equities.

And if so, why?

I understand that the theory goes: Traders sell bonds, for whatever their reason. Such selling creates higher yields, which then makes for stiffer competition with the stock market. Traders see that the risk-free yield of bonds is higher and more tempting than before, and accordingly sell off stocks with the intention of buying bonds instead. They risk less by buying bonds rather than stocks, yet lock in on an attractive yield.

But the only reason yields go up is because people are selling bonds. If the bond market is crashing, why would traders sell stocks to buy bonds? Wouldn't they avoid bonds? Sure, bond yields are high, but that's only people are hating bonds now. That's why I can't believe in this view that the sell-off in stocks is driven by greed for higher yields in the bond market. Why sell quality stock investment opportunities in favor of a losing bond market?

Trading and rationalizing don't mix.


Index futures and bonds are on the downtrend.
So just focus on the charts and trade accordingly.
The chart is always correct.

More analysis will lead to a data analysis paralysis problem.


Let the professors in Economics and professional writers do all the
rationalizing/reasoning.

Also professional traders and professional writers don't mix.


Do bond yield increases lead to stock downtrends?
Sometimes yes, sometimes no.

 

[nitrene]

If you study academic Finance the infamous CAPM theory (Capital Asset Pricing Model) does talk about the correlation of interest rates to security valuations (as detailed in Graham & Dodd's famous works).

If the discount rate rises (aka interest rates) the valuation has to go down. Present value of all future earnings discounted back to today's value. When I studied it in the late 1980s the calculation involved using the 30yr rate and trying to calculate the earnings for the next 30 years.

 

[murray t turtle]

There is not a direct relationship between interest rates and stocks. But aspects to consider - Many stocks are held for their dividend payout. Higher rates make these stocks look less attractive. If you hold stock on margin the cost to carry is higher with higher interest rates. A lot of companies are holding interest rate sensitive assets at an unrealize loss. The later is the most worrisome. Several new members to The Fed's BOG lack. All they can vaguely understand is raise interest rates and inflation will eventually come down. There are a plethora of secondary consequences that apparently were just not considered.

%%
And higher rates can make money [borrow] more expensive.
SO much baloney on talking snake media, many of those are anti -capital+ anti common sense. NPR is among the worst /''stocks went down on profit taking ''LOL
A grain of truth there, but stocks + ETFs go down loss cutting \selling + stupid unions like DAL, GM,AMR bankrupt LOL
I just looked @ a big cap tech leader, seeing if high rates would make it less valuable, hear so MUCH whine about that/ probably not with only debt of 8%GM has 112% debt\DAL has 312% debt, i used IBD data