Rising U.S. Treasury yields may begin to lure stock investors to bonds, crimping a six-month stock rally.
Yields on long-term Treasury bonds have spiked over the past two months to just under 5 percent, as hopes for an interest-rate cut by the Federal Reserve have dimmed.
At this level, some experts fear that money will be yanked from equities and put into bonds, certificates of deposit and savings accounts, depressing stock prices.
"When you have a spike up in rates, generally it's not the best thing" for stocks, says Richard Dickson, senior market strategist at Lowry's Reports, a research firm.
Sudden bond-yield increases often precede stock-market declines. A recent example is shown in the smaller charts below.
There have been times, such as the late 1990s, when bond yields and stock prices have risen in tandem. And some analysts say stocks still look inexpensive relative to bonds.
While 30-year Treasury bonds yield about 5 percent, stocks have an average earnings yield — a ratio of per-share earnings to stock price — of 6 percent to 7 percent, says Ed Keon, director of quantitative research for Prudential Securities.
"That suggests there's a cushion there, where even if bond yields do rise modestly, stocks would still look cheap relative to bonds," he says.
A greater concern is that yields may continue to rise. A stronger-than-expected economy, evidenced by 3.5 percent annual growth in fourth-quarter gross domestic product, is deflating hopes that the Fed will cut rates. While the Fed didn't change interest rates after its meeting Wednesday, it indicated it was leaning more toward raising rates than cutting them because of inflation risks.
Rising rates can hurt stock prices. A recent example: The yield on the 10-year Treasury spiked from 4.7 percent to more than 5 percent between March and May 2006. The Standard & Poor's 500 lost 3 percent in May of that year.
