Stocks and 10 Year Bond Yields

Stock-Markets / Stock Market 2023 Dec 15, 2022 - 10:38 PM GMT

The consensus view is that falling bond yields are good for stocks. However that is not accurate, what stocks like is mildly falling OR rising bond yields. What stocks do not like is what we have witnessed since the start of the year, that is fast moving bond yields as the bond bubble burst in the wake of HIGH INFLATION.

Therefore the pattern one needs to witness is for BOND YIIELDS peaking, stabilising and entering a shallow downtrend, that is what is best for stocks. Are we gong to get that? I doubt it. But the overall trend pattern suggests that bonds are in capitulation of sorts which will punctuate in peak rates that should give stocks a TEMPROARY BOOST, i.e. bond yields will peak and then FALL at a rapid pace! And that is the problem because bonds are a competing asset class to stocks. So becareful what you wish for, rapidly falling yields are NOT bullish for stocks!

At best stock investors can hope for is a mild trend lower in yields which given that inflation should remain well above the Fed's 2% target is probably what is gong to happen and therefore should at least act to put a floor under the stock market during 2023.

What this implies is that after the initial ergophobia of peak rates, probably during Q2 of 2023, stocks will be WEAK as rates fall as investors switch to capitalise on rising bond prices as the US economy continues to weaken. Though I doubt we will see the price of 2022 repeat i.e. I doubt we we will see lower lows despite rising bond prices a net negative for stocks however they also act to be supportive of stock prices in the longer-run which stocks tend to discount in the present by looking beyond the recession..

I am NOT a bond investor, not my cup of tea but given what is likely to transpire I am investigating some limited exposure to bonds going into 2023, and given that I reside in the UK, the following two bond funds are on my radar IBTM and IBTL. I am not expecting huge return, maybe in the region of 10% to 20% after f/x. Definitely not for the long-run, more a range trade as I do with stocks such as GSK, but at least it gets me a little more out of sterling into something that should beat UK Inflation.

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By Nadeem Walayat

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Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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