Treasury Yields Will Become a Headache for Stocks Around 1%
- Persistently higher yields may spark a sell-off in stocks
- 10-year yield at 1.25% may send S&P 500 down more than 10%
A trader points to monitor displaying an S&P 500 Index (SPX) chart on the floor of the New York Stock Exchange (NYSE) in New York, U.S.
Photographer: Bloomberg/BloombergThe current melt-up in U.S. stocks may be put to the test by a persistent steepening in the yield curve, an analysis of discount rates, equities and Treasury yields shows.
Correlations between stocks and bonds have come under closer scrutiny in recent weeks with equities climbing to unprecedented highs despite a poor economic outlook. At Tuesday’s record close of 3526, the S&P 500 Index is trading at a discount rate of 3.68% on earnings projected at $130 a share. That suggests a margin of about 300 basis points over the current 10-year Treasury yield, which is broadly consistent with the gap against the index’s earnings yield at the end of last year.