15 September 2019
Stock market investors will watch closely the pace and scale of US bond yield rebound. Photo: Reuters
Stock market investors will watch closely the pace and scale of US bond yield rebound. Photo: Reuters

Will rising US Treasury yield hurt the equity market?

The 10-year US treasury yield hit the key psychological level of 3 percent on Tuesday for the first time in four years.

Billionaire bond investor Jeffrey Gundlach once said that if the 10-year yield does crack the 3 percent ceiling, it would officially end the US debt boom.

The long-term bond yield has been considered a critical reference for commercial lending. Therefore, the borrowing cost is set to rise.

As I’ve noted before, that long-term US treasury yield had been trending downward for more than three decades. It has started to show signs of trend reversal since early this year as it broke the key resistance of 2.8 percent.

After some pullback, the yield moved above 3 percent, which reinforced the conviction that long-term interest rate trend has reversed. We can almost be certain that the US treasury yield is going to keep rising for a sustained period.

Fundamentals point to the same conclusion.

US nominal GDP growth has very close relationship with core consumer-price index, albeit with a time lead of five quarters. US economic growth started to accelerate since mid-2016, which suggests the CPI will reflect that from early 2018.

Global economic growth remains intact so far. At the same time, geopolitical risks and US-China trade war have pushed up oil prices and other commodities. Against such backdrop, inflation in US and worldwide could go higher.

In this case, US inflation pressure may exceed market expectation, which would further push up long-term yield.

Will that weigh on equities?

It depends on the pace and scale of yield rebound. If yield picks up too quickly, it would lead to a stock market sell-off. Nevertheless, if yield climbs in an orderly manner, funds may flow from the debt market into equities.

The full article appeared in the Hong Kong Economic Journal on April 26

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist