Love-Hate Relationship Between Bond Yields and Stock Prices

Stock prices and bond yields have historically had a love-hate relationship that would make the romantic ups and downs of any soap opera seem mild by comparison. Currently, the relationship between them remains tight and far from crossing the line that would lead to a breakup.

 With the 10-year Treasury yield rising a half of a percentage point last month, investors are beginning to wonder when rising interest rates may start to negatively affect stock prices. Higher yields can slow borrowing and spending, weighing on economic and profit growth. Although unlikely, if this pace of rising yields were to continue over the next six months, they could exceed 5% by year-end, a level not seen since July of 2007.

While higher rates are bad news for bond investors, the good news is that rising yields may mean rising stock prices at least for some time yet. Historically, it has been around a yield of 5% on the 10-year Treasury where yields cross the line and begin to become a negative for stocks and the hate part of the relationship begins.

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