Bond yields are ‘elephant in room’ stock investors are ignoring

If professional investors are worried that the rise in global bond yields will derail a bull market in stocks, you’d never guess it by looking at what they’re doing with the money they manage.

Global fund managers have 56 per cent of their portfolios in equities, the highest proportion since November 2021, according to Bank of America Corp.’s latest survey. The bullishness toward stocks comes even as the same survey shows that a “disorderly rise in bond yields” is considered the second-largest threat to the equity market after concerns about an artificial intelligence bubble. In a related risk, 25 per cent of respondents cited a second wave of inflation as the largest risk.

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Yet while strategists up and down Wall Street are watching the rise in yields with some concern, they are for the most part concluding that they haven’t climbed high enough to derail the bull case for stocks. After all, history shows that sudden spikes in yields aren’t always poison for the stock market.

“You should be bullish, or at least opportunistic here,” JC O’Hara, chief technical strategist at Roth Capital Partners LLC, said of the stock market sitting near record highs despite climbing yields. Risk appetites are improving on a combination of “stronger earnings expectations, better economic outlooks, and a lighter focus on Middle East tensions,” he said, adding that forward returns for the S&P 500 tend to be strong when risk appetite is improving.

For those who are concerned about the rise in yields, Wednesday offered some relief after the United States Treasury unexpectedly said it would ramp up buybacks of long-dated government debt in a move that sent the 10-year yield down six basis points to 4.65 per cent. The 30-year yield, which earlier this week returned to the highest since 2007, slid nine basis points to 5.19 per cent. Rates on both were creeping back up early Thursday, however.

For other stock-market analysts, it’s the yield curve — or the difference between rates on short-term and long-term Treasuries — that’s worth watching. And the equity market is currently enjoying the “sweet spot” of the curve, Ed Clissold, chief U.S. strategist at Ned Davis Research, wrote in a note to clients on Tuesday. Currently, 10-year yields are about 49 basis points higher than two-year yields.