US stocks saw their biggest one-day fall in six years on Monday, as investor profit taking brought the market back down from record highs seen in late January, after benchmark bond yields rose to a four year high last week. Here are some thoughts on why that can be bad for equities.
The recent strengthening of stocks in India despite rising bond yields suggested that the market was expecting a strong earnings recovery.
The Technology sector continued its decline, which cause the Nasdaq Composite Index to drop by 2.1%.
While not everyone is in love with the comparison, many investors feel safe when that number is comfortably above Treasury rates - which it is, by about 1.5 percentage points.
Since the start of the year, prices for developed-market sovereign bonds have been in decline, sending yields sharply higher.
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Another way of thinking of this is to consider valuation multiples for each security.
The sharp increase in bond yields in India over the past few weeks has been attributed to investors' concerns about the fiscal slippage in FY18 and a higher-than-expected fiscal deficit target for FY19. A rise in Treasury rates to about 4.3 per cent would leave the ratios even.
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The market's main gauge of volatility, the CBOE Volatility Index, fell to 29.82 on Thursday, more than twice what it was a week ago but down off a two-and-a-half year high above 50 points hit on Tuesday.
"The simplest way to look at it is, everything is relative".
For now, USA bond markets are setting the tone for euro zone peers, said analysts, with many expecting 10-year Treasury yields to test 3 percent soon.
A related concept is net present value. It also means Americans will pay more for mortgages and loans.
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In recent times, India's equity indices rallied to record high levels despite a steady spike in bond yields.
Oil prices fell to a one-month low after US data fueled fears of oversupply. To take that risk, one would certainly seek a risk premium over risk-free or less risky assets such as bonds. The bond yield/equity yield or BEER ratio at 1.85 makes equities look overvalued.
United States stocks saw the biggest one day fall in six years on Monday as investors rushed to take profits, after bond yields rose sharply last week, following an equities rally to record levels in January. Rock-bottom financing costs have been a boon to earnings for a decade, a period in which the Federal Reserve has held rates near zero. The S&P 500 did not fare any better. "I don't think he wants to establish right away that he wants a "Powell put" the way we had a "Greenspan put" and a 'Bernanke put"'.
Benchmark 10-year notes last fell 2/32 in price to yield 2.8403 percent, from 2.832 percent late on Wednesday.
The 10-year notes last rose 38/32 in price to yield 2.7093 percent, down from 2.852 percent late on Friday. The rising Treasury yields, the jobs data and the overall economic data are all signs that inflation is going to rise. All of that could result in a recession, which in the end is what most analysts say will kill the bull market.
In Europe, bond sell-offs got worse and the equities market continued its downslide. The firm manages US$179 billion. Accelerating inflation may crimp corporate profits.
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