How Rising Debt Yields Impact Equity Markets
During an economic recovery, U.S. Treasury yields tend to rise as investors sell “safe” assets like government bonds and move into growth-focused equities and other more aggressive, economically sensitive investment assets. As the demand for Treasuries decreases, the price generally decreases accordingly, driving up yields that move inversely to price. While economic recovery can be very beneficial for stocks by increasing revenues and profits for companies, the rising yields that often accompany such a recovery pose challenges of which investors should be aware. Higher yields, all else being equal, increase the cost of debt for businesses, make bonds relatively more attractive as they compete with equities for investors’ money, and increase the discount rate which makes the future cash flows of companies worth less in terms of net present value. Investors can potentially benefit by taking a tactical approach and directing an overweight allocation toward sectors and geographies that typically benefit from higher interest rates.
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- Anthony Winkels is Managing Partner and Wealth Advisor at Fortis Wealth Management
