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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