Equity-Market Smiles Don't Have to Become Frowns

As 10-year Treasury yields climb, investors are fixated on 3 percent, a level where many fear an equity market meltdown. Yet that threshold has no fundamental relevance. Instead, investors should try to understand why yields are rising, and draw the right investment conclusions.

A common misconception is that equity prices are inversely related to bond yields. Surely, that is wrong. The Nikkei lost almost three-quarters of its value in the 1990s, a period that coincided with a plunge in Japanese government bond yields. More recently, global equities advanced strongly in the second half of 2017, along with bond yields.