FxWirePro: Rising bond yields likely to pose challenges for stocks

Global stocks have been steadily rising since the ‘Great Recession’ of 2008/09 on the back of economic recovery and ultra-loose monetary policies pursued by major central banks around the world. The U.S. benchmark, S&P500 is in its 9th year of bull run. Since 2009, the index has returned more than 3200 percent. The story is more or less similar for global stocks. The latest rise in S&P 500 came on the back of economic recovery and tax reforms proposed by the Trump administration. Stocks are rising on the fact that tax cuts immediately improve the bottom line of the companies.

However, this optimism is likely to start fading going forward as central banks have begun reversing the ultra-easy monetary policies or have signaled an intention to do so. This has given rise to bond yields across the globe. While rising bond yields not necessarily lead to a meltdown, a rise in the risk-free rate of return coupled with rising oil price is a recipe for selloffs.

The following table shows the rise in yields, compared to 2015, when in December the U.S. Federal Reserve increased rates for the first time.

While the changes have been relatively small so far, it is likely to rise more rapidly, when more and more central banks join the U.S. Federal reserve in winding up the ultra-easy monetary policies.

The rise in German yield is pretty significant given the fact that the European Central Bank (ECB) and increased its asset purchases since 2015, which shows that the market is warming up to the risk of higher inflation and higher interest rates.