10-Year Yield and Stocks

Generally speaking, low interest rates are interpreted as a good environment for stocks.  However, over the last six months, the opposite trend has been in place.  When interest rates rise, stocks have been going up, and when interest rates fall stocks have declined.  The top chart below is a reprint of a chart we highlighted yesterday which shows the yield on the ten-year US Treasury since June.  Over this period, interest rates have been in a downtrend, with three periods where yields rallied to the downtrend before resuming their path lower.

In the second chart, we show the S&P 500 over the same period.  The sections of the chart in red highlight the three periods where interest rates rallied.  As shown, during each increase in rates, the S&P 500 rallied (although each successive rally has had less and less strength).   This current dynamic between stocks and bonds is likely to continue as long as credit markets remain on alert.  As credit fears increase, Treasury bonds are likely to rally causing yields to fall while stocks decline.  Then, when credit issues abate, investors are likely to rotate out of bonds and into stocks.

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