How 3% Yields Could Change the Investing Landscape

Rising Treasury yields are “prompting investors to dust off their playbooks for how to trade in an era of relatively higher rates,” according to a recent Bloomberg article.

The article cites comments by Jim Paulsen, chief investment strategist at Leuthold Group, who wrote in a client note, “Historically, the stock market has done OK with rising inflation, provided economic momentum was also rising.” Paulsen added that stocks have performed well in moderate economic growth climates if inflation is also held at bay, but that stagflation (inflationary period accompanied by low economic growth) has “produced poor results in both the stock and bond markets.”

Since the financial crisis, the article reports, stocks have paid more than fixed income instruments, but the premium is falling to the lowest level in eight years. Chris Verrone, head of technical analysis at Strategas Research Partners, told Bloomberg Television, “This is a 35-year trend change in bonds, we think it’s just begun.”

The article adds that, while less creditworthy companies have benefited from low yields, higher borrowing costs could take a toll. “For now,” it says, “corporate credit is hanging in, with high yield spreads remaining off the tightest level since before the financial crisis.” Higher yields have also “lured investors back to the greenback,” the article says, noting that the Bloomberg Dollar Spot Index is “in the midst of its best four-session stretch since the 2016 U.S. election.”

Not everyone agrees, the article notes, citing comments by Rabobank strategist Michael Every, who views the 3 percent yield merely as a “nice round prime number of the special psychological kind,” and urged investors to remain calm. “After all,” he wrote in a recent note to clients, “the last time we got to where we are now, back in February, the 10-year rapidly retreated back to a low of 2.73 percent.”