LIVE MARKETS-The economy may be able to handle 5% yields, but can stocks?

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THE ECONOMY MAY BE ABLE TO HANDLE 5% YIELDS, BUT CAN STOCKS?

The benchmark 10-year Treasury yield US10YT=RR has jumped to 4.79%, making investors nervous that it will soon reach the psychological 5% level, which some traders say could be negative for growth and risk assets.

But Nicholas Colas, co-founder at DataTrek Research, says that while the 5% level may make equity investors nervous, the U.S. economy can sustain it.

“The US economy should be able to withstand 5 percent 10-year yields, but equity markets may not like testing this theory,” he said in a note on Monday.

One reason the 5% level may make stock investors nervous is that the 10-year Treasury yield has rarely surpassed it over the past two decades.

The yield breached the 5% level from May to July 2005 and from June to July 2007. “While the US economy was able to shrug off the former period, the latter was just 5 months before the start of what would become the Great Recession,” Colas notes. “We don’t expect a repeat of the 2008 Financial Crisis. But the market’s memory can be long.”

The yield also flirted with the 5% level in Oct. 2023. The S&P 500 fell by 10.3% from July 31st through October 27th as rates headed into this peak, he said.

“Aside from these very brief periods, 10-year yields have always been well below 5 percent over the last 20 years. That’s both due to sluggish economic growth after the Great Recession and long periods of Federal Reserve bond buying,” Colas said.

“We are at the outer edge of the proverbial envelope and, while we remain bullish, we understand why investors have concerns about rapidly rising interest rates,” he said.

(Karen Brettell)

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