It's Not 3% Yield That Threatens Stocks Going By 40-Year Pattern

(Bloomberg) -- A two-week bounce in equities seemed to be losing steam as the 10-year Treasury yield approached the much feared 3 percent. The worry is premature, according to Tom Lee, the co-founder of Fundstrat Global Advisors LLC.

While almost every major peak in bond yields since 1980 has coincided with declines in stocks, a trendline that plots the highs points to a danger zone of 3.25 percent to 3.75 percent. The study is part of a model that informs Lee’s prediction that the trouble for equities would be a 4 percent yield, rather than 3 percent.

It's Not 3% Yield That Threatens Stocks Going By 40-Year Pattern

“Since 1980, interest rates and bonds are negatively correlated. Higher rates = lower equities,” Lee wrote in a note to clients. “When 10Y touches the trendline, it has marked past equity tops.”

It’s the second time this year that a 3 percent yield emerged as a headwind for stocks. The S&P 500 fell for a second day Friday as the 10-year Treasury yield rose to as high as 2.94 percent. A similar spike in February was blamed as one catalyst that sent the S&P 500 to its worst selloff in two years.

Debates over the ramifications of interest rates are heating up as the Federal Reserve is expected to raise borrowing costs at least three times this year. While Wall Street strategists agree higher bond yields will hurt earnings and make equities less attractive, they differ on what levels would present a pressure point for the stock market. Some cited 3.5 percent, while others say it’s the pace of the increases that matters.

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