Wednesday, June 26, 2013

Early Cycle Interest Rate Hikes:

The recent sell off in the global stock bourses in response to a sudden bounce in the US 10-yr T-note yields was a little overdone. The equity market does not always torpedo during a period of rising bond yields (or falling bond prices).

Bond yields will typically decline during periods following asset bubbles, recessions and bear equity markets. The subsequent doom and gloom period will then be followed by a recovery and during the early to mid point of an economic recovery the equity market needs the confirmation of modest rate increases. Early cycle interest rate hikes are a positive because they reflect an improving economy and the banking and insurance companies thrive in these early cycle rate hike periods and what is good for the banks is good for the stock market. There are many periods where bond yields rise at the same time as rising stock prices – the two periods displayed are just an example – so enjoy!

Chart one is the 2005 – 2006 period of rising rates and rising stock prices

Chart two is the 2009 – 2010 period of rising rates and rising stock prices

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