Why rising long bond yields is a cause for equity investors to celebrate
Recently the market has been spooked by rising long term bond yields. Over 2021 technology shares have particularly been impacted by this thematic, some appropriately others perhaps more by association.
I wrote about why interest rates matter for businesses whose promise of cash generation is very far into the future in the article below:
In this article there are three points I want to make about rising long bond yields.
The first is that long bond yields are not high. Consider the TMT boom where technology share prices rallied so famously before the tech wreck commenced in March 2000.
For context 10-year US Government Bond Yields relative to during the TMT boom:
· 1.71% on 18 March 2021.
· 4.69% at the start of 1999 and
· 6.58% at the start of 2000.
The second point is that rising rates did not disrupt the TMT boom.
The third point is that rising long bond rates are welcome because it means all is well. The US bond market is famously sophisticated and gave warning of both the Tech Wreck and the GFC in the form of falling long bond yields.
Let me support that last claim.
The TMT bubble burst in March 2000. Look at the 10 year and the 30 year US Treasury yields which provided over two months warning of the Tech Wreck. The 30-year bond peak was mid-January whereas money market rates (which are more closely connected with official cash rates) kept rising all the way into March.
The global financial crisis first started savaging share prices in October 2007. As the graph below shows US long tenor bonds starting providing warning in July with the rest of the US Treasury market also offering very clear warning from August.
One of the benefits of having a multi-asset investing framework is these cross-asset class insights.
Lets now look at the current US bond market yields and see if the US Treasury market is giving us any cause for caution:
Far from being a cause for concern, rising long bond yields gives me great comfort.
More broadly economic activity in the US is being turbocharged with twin tailwinds of government money and interest rates that make every project attractive. This eruption of mandated activity will feed near term economic multipliers, earnings and cash generation for equity investors.
My only concern is that we are now at or close to max stimulus. However, like China’s aging demographics, its too early to worry about that for now.