Rising Yields Nothing To Fear for Stock Investors

Investors have nothing to fear from the 10-year Treasury yield’s rise above 3%, one analyst says.

As long as the economy continues to grow, BTIG chief strategist Dan Greenhaus suggested that yields and stocks can keep rising together.

“We have been writing all year about interest rates and the fact that higher rates were not, and are not, on their own something to fear,” Greenhaus wrote in a note to clients. “Indeed, rates have moved markedly higher in 2013, but so have stock prices.”

The 10-year Treasury yield reached an intraday high of 3.019% Friday, the highest level since July 2011, before pulling back to 2.993% in recent trading. The yield has climbed from 1.756% at the end of 2012, the biggest annual increase since 2009.

Meanwhile, the S&P 500 has surged 29% this year, hitting 44 record highs along the way, and is headed for the best annual performance since 1997. The index was little changed at 1841 in recent trading.

The 10-year yield started rising sharply in May after the Federal Reserve indicated that it could start winding down its bond-purchase stimulus program. That led to a 5.8% slide in the S&P 500 from May 21 to June 24, the biggest pullback of the year, but the index was back to hitting record highs by July 11.

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In the meantime, Greenhaus noted that economic growth has improved markedly from +0.1% in the fourth-quarter of 2012 to +4.1% in the third-quarter of 2013.

“Simply put, if the U.S. economy is going to perform better in 2014 than 2013 — and we expect it will — then yields will have to move higher,” Greenhaus said. “Not because of the Fed tapering, although that’s part of it, but because that’s just what happens.”

In 2009, yields rose from 2.244% to 3.843% and the S&P 500 climbed 23%. GDP improved from -8.3% at the end of 2008 to +3.9% in the fourth quarter of 2009.