Why soaring US Treasury yields are driving down stocks around the world
As we write UK stocks have stabilised after a hairy few days prompted by spiralling yields on US Treasury (government bond) yields.
Yields rise when the price of Treasuries is falling. Having exceeded 3% for the first time in four years in May, the yield on 10-year Treasuries hit 3.25% on 9 October, its highest level since 2011.
Increased expectations for inflation in a strong US economy have been spooking holders of bonds as rising prices erode the ‘real’ value of the fixed payments from a bond. This has prompted a sell-off, driving down prices and driving up yields.
The rise in yields also reflects expectations for faster increases in US interest rates; the Federal Reserve increased rates to a range of 2% to 2.25% at the end of September – a level not seen since April 2008.
Rising Treasury yields negatively impact stock markets as the income available from relatively lower risk government debt becomes more attractive than that from higher risk equities.
As they also reflect higher costs of borrowing, they could put pressure on business and consumer spending.
If people are buying fewer products and services or if investment within businesses declines then estimated cash flows for many listed companies will likely fall and this will typically result in lower share prices. (TS)
Investment bank Berenberg’s latest poll of a collection of analysts paints a negative outlook, reflecting the most bearish reading since the broker started polling analysts in August 2015.
Berenberg expects a slowdown in global growth, flagging the ‘broad-based nature’ of it suggests more than just trade disputes at work.
In the data series, 27% of analysts imply a positive outlook for economic growth, down from 46% in January.
And the number of analysts that believe growth is slowing has doubled from 24% to 49%.
Berenberg analyst Nick Anderson says there are several factors that could be behind the slowdown, specifically a rapid reversal in monetary stimulus in China and weaker US consumer data.
Looking at US consumer spending data, Anderson says furniture sales, which indicate economic factors such as disposable income, confidence and credit availability, have recently softened. (LMJ)