Forex Flash: Analyzing the impacts of bond yields on equities – Goldman Sachs

One of our most frequent topics of discussion with investors currently is the impact of rising bond yields on equities. According to the Economics Research Team a Goldman Sachs, “In examining the relationship between rises in bond yields on equity prices and sectors, we see the early rises in yields from recent record low levels as benign for equities. In our view bund yields would need to rise well over 3% before they became a major threat to equities so long as inflation expectations remain stable. Cyclicals tend to perform best with steeper yield curves and higher yields.”

Moreover, “We feel that equities are likely to achieve above average returns over the next few years even as bond yields gradually normalized. The relationship between changes in bond yields and equity prices is not a constant one. In general, for most of the post-war period, rising bond yields have been inversely correlated with equity prices.”

When the technology bubble burst in 2000, the correlation reversed and has become very closely correlated since the financial crisis: falling bond yields have been accompanied by falling equity prices as growth expectations have collapsed. We have argued that the initial rises in bond yields will be positive for equities so long as inflation expectations remain subdued, as we expect.