Optimists are mounting voices about bonds, which poses a serious question for equity investors, which is when should they worry about rising 10-year interest rates?
Estimates of global economic growth and corporate profits are improving, confirming optimistic investor expectations that have pushed stocks and commodities prices higher in recent months.
Global interest rates rose for 10 years, in the United States, Japan, China, Australia, Europe and the United Kingdom, and reached their highest levels in nearly a year.
This is part of the process of justifying financial market assessments that comes with the economic recovery, even as bond yields drop to historically low levels through massive central bank buying programs.
“Bond yields are rising from exceptionally low levels, indicating increased private sector confidence, economic growth prospects and healthier earnings growth,” said James Paulson, director of investment strategy at Leuthold Group.
Certainly, improved recovery prospects are the desired outcome after the epidemic.
However, weaning the economy and markets from artificially low interest rates will be difficult.
Global bond markets are helping to determine borrowing costs for homeowners and companies so that they can play an important role in helping to boost the economic recovery, and this explains why central banks are targeting to keep government interest rates for 10 years, low.
However, low interest rates encourage investors to buy stocks and corporate bonds because they see them as better alternatives than the modest returns from owning government debt.
Over the past 11 months, global stock prices have risen by nearly 70%, sending the MSCI All World Index into a new record territory, and some parts of the stock market, including shares of small companies and technology and clean energy companies have enjoyed large gains since their decline. Last March.
Hence the fears that a further increase in interest rates for 10 years, along with the rise in oil prices, may cause stocks to fall. However, corrections are integral to emerging markets.
Instead of blaming the bond market or expecting central banks to bolster their support, equity investors should take advantage of any slump and stay in the stock market for a longer period of time.
The usual scenario for an economic recovery – as it did in 2003 and 2009 – is that in the early stages of the recovery, higher corporate profits offset the increase in interest rates.
Indeed, a significant increase in corporate profits is expected this year, and Societe Generale indicates the consensus on an expected increase in profits of 30% this year for companies included in the MSCI Global Index, and 40% for emerging markets.
Sentiment remains very high, and the latest monthly survey of global fund managers by Bank of America highlighted this week that liquidity levels in portfolios are being reduced to their lowest level in 8 years. At the same time, exposure to stocks and commodities is at its highest level since 2011 year.
The market enthusiasm reflects the potential for economic revival thanks to vaccines, and this could include the unexpected boost in restoring lost service sector jobs fairly quickly.
And things could get really interesting in the bond and equity markets’ relationship if the economy rebounded so strongly that it made it difficult for the Fed to keep 10-year interest rates at historically low levels.
It appears that expectations of a 10-year benchmark interest rate increase in the US from around 1.3% now are justified, after economists agreed that the US economy could grow this year by 4.8% from 3.9% in January, according to Bloomberg News.
But even those estimates could be low given the additional $ 1.9 trillion stimulus currently being pushed by the Biden administration.
David Kelly, chief global strategist at JP Morgan Asset Management, says: “Long-term interest rates in the United States are not in order, and by the end of this year there will be a simultaneous global recovery and a large budget deficit that needs financing.”
In his view, a 10-year rise in US interest rates of nearly 3% is logical given the expected expansion of the economy and a possible return to an inflation rate of 2%, and until this stage is reached, Poulsen of Leutold believes that investors should pay attention. To the historical pattern of stock market performance against 10-year interest rates since 1900.
“When bond yields were below 3%, as they are today, stocks rebounded while yields rose,” he says. Instead of fear of the bond market, equity investors can enjoy a further rise with the stronger economy boosting corporate profits, as well. It definitely leads to higher interest rates.
This is called a recuperation.
Written by: Michael MacKenzie, Capital Markets Editor for the Financial Times.
Source: The Financial Times.
The article Michael McKinsey writes: Should equity investors be concerned about rising interest rates? It was written in the Stock Exchange newspaper.