Financial brokerage Emkay Global has issued a cautionary note regarding the potential impact of rising US 10-year bond yields on equity markets. According to their latest global strategy brief, the stock market is increasingly focused on yields surpassing the 5-5.25 per cent threshold as a critical trigger for a potential equity selloff.
The Yield Threshold and Market Dynamics
While acknowledging the historical concern that higher yields can cause temporary disruptions, Emkay Global emphasizes that the current US economy and market structure have undergone significant changes since previous similar episodes. This evolution, they argue, makes historical precedents less reliable as a guide for future market behavior. Despite the looming yield concerns, the brokerage maintains a relatively constructive outlook on equities.
Data indicates that the US benchmark S&P 500 has more than tripled since its COVID-19 lows and grown 2.4 times since the end of 2019. This growth has been underpinned by an extraordinary fiscal-led global growth reflation, resilient household and corporate balance sheets, and the increasing dominance of globally diversified, asset-light, and cash-generative US technology companies.
Underlying Drivers of Rising US Bond Yields
Emkay Global points to several fundamental factors driving the renewed 'bear-steepening' in developed market (DM) yield curves, suggesting this trend is unlikely to reverse easily. These factors include:
- Fiscal excess in the US economy.
- Structurally higher real interest rates.
- Increased capital demand driven by Artificial Intelligence (AI) advancements.
- Hawkish policy repricing by central banks.
The firm believes that treasury buybacks, while potentially containing symptoms, will not resolve the underlying US funding problem. Consequently, Emkay Global remains cautious on bonds, viewing US Treasury (UST) volatility as a greater cross-asset risk than the absolute level of higher yields alone.
Equity Resilience and Other Risks
Emkay Global suggests that equities may prove more resilient to higher yields than conventional analyses might imply. They highlight that strong balance sheets, robust earnings, and the growing influence of cash-generative US Tech firms indicate that growth could matter more than the absolute level of interest rates. They cite the 1990s as an example, where the UST 10-year yield averaged 6.65 per cent during a decade of strong equity returns.
"Higher leverage has not translated into weaker earnings, while any effective cap on yields could further support equity multiples. The bigger risk, in our view, is bond-market volatility rather than higher yields per se."
Currency Implications
The resulting policy unpredictability is seen as cyclically negative for the US Dollar (USD) and positive for gold. However, Emkay Global maintains a medium-term neutral-to-positive stance on the dollar, attributing this to the absence of credible reserve-currency challengers and the continued dominance of US growth and capital markets.