Overview
When Do Higher Yields Start to Hurt Stocks?
Executive Summary
Bond investors have had a rough few years. Since the 2020 lows, 10-year government yields have climbed roughly four and a half percentage points in the US, Australia and Germany. Anyone who bought “safe” long bonds near the bottom is now sitting on losses of up to 20%. Yet the share market has barely flinched. Why have equities shrugged off one of the sharpest bond repricings in a generation, and can it last?
In this episode of Pacific Flagship, John Eliopoulos, Chief Investment Officer at Pacific Private Asset Management, takes on the question clients ask most: when do higher yields actually start to hurt stocks? The answer comes from all 24 major postwar rises in real yields since 1948, and it isn’t what most investors would guess. The signal the market watches most closely turns out to be a poor guide. What matters is a single line, and which side of it you’re on has meant the difference between strong returns and losing money. John explains where that line sits, which warning signs PPAM is watching, and where we stand today. If you hold equities, you’ll want to know how close we are.
In this episode
In conversation with Ben Grodski, Founder & Managing Director, John explores three key questions:
- Why are bond yields rising? How growing government debt, now around US$40 trillion in the US and $1 trillion in Australia, is leading investors to demand a higher term premium, and why we now see higher yields as a long-term shift rather than a short-term cycle
- Why have equities held up, and will that last? Insights from research covering 24 post-war rising rate cycles, showing that the level of real bond yields relative to economic growth matters most for equity returns
- What are we watching for? The crossover point between real yields and economic growth, and key warning signs including small-cap earnings, credit defaults, mortgage arrears and stress in private credit and private equity
The discussion also covers the key changes to our asset allocation in our September outlook:
- Bonds moved to neutral, as we expect yields to stay higher for longer
- Australian REITs moved to underweight, given their sensitivity to rising bond yields
- A modest overweight to equities maintained for now, with a more cautious outlook as we closely monitor incoming data
At Pacific Private Asset Management, our investment decisions are underpinned by independent research, active portfolio management, and a commitment to helping clients achieve their long-term financial objectives.
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