How High Can Bond Yields Climb Before Stock Investors Worry?

(Bloomberg) -- U.S. stock investors are showing signs of being less jittery than their Asian peers as a rout in Treasuries deepens.

Futures contracts on the S&P 500 Index fell as much as 0.5 percent in Asian trading, building on a move that saw the underlying gauge pull back from a fresh all-time high on Wednesday as government bonds extended their slump. The MSCI Asia Pacific Index fell as much as 1.2 percent as the dollar strengthened.

The current bond selloff is casting minds back to February when the prospect of runaway inflation and fears that higher interest rates could hurt profitability were enough to cause a correction in U.S. stocks. The benchmark index had its worst monthly performance in two years after slumping 10 percent in nine sessions from a record high on Jan. 26.

Not so much this time, as companies have proved they can withstand a higher rate environment, said Alva Devoy, a managing director at Fidelity Investment Management. “Your cost of capital has doubled in the last year, yet look at the out-turn we just had in the earnings season. It’s been phenomenal.”

Still, the relative appeal of stocks is waning compared to fixed income. Yields on 10-year Treasures breached 3.2 percent for the first time since 2011, while U.S. equities are estimated to yield about 2 percent in 12 months, the widest gap in eight years, according to data compiled by Bloomberg.

That’s no reason to dump stocks and jump into bonds just yet, said Kerry Craig, a Melbourne-based global markets strategist at JPMorgan Asset Management.

With low near-term recessionary threats, a good earnings outlook and potential for U.S. stocks to rise in the high single digits in 2019, you may want to keep owning that market right now, he said by phone. “Treasury yields will have to go above 3.5% to see that wholesale rotation out of equities into fixed income.”

To contact the reporter on this story: Matthew Burgess in Sydney at mburgess46@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Naoto Hosoda, Teo Chian Wei

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