“Generally, when central banks pull back on stimulus that ultimately is the catalyst that brings growth to an end,” says Jeff Klingelhofer, a portfolio manager at Thornburg Investment Management. “The major story the next couple of years will be watching central banks.”
Also adding upward pressure on Treasury yields is an increase in supply. The Treasury announced last week that it would be adding $42 billion of new issuance over the coming quarter, including $1 billion each in upcoming 5-, 7-, 10- and 30-year bond auctions, and that can continue to grow as the deficit grows.
On the plus side, higher yields make bonds more competitive with stocks. One way to view the comparative value of bonds vs. stocks is to compare the earnings yield of the S&P 500, currently about 4.3%, against the 10-year Treasury yield. The difference currently is roughly 1.5 percentage point — the smallest spread in eight years — and traditionally the minimum to give stock investors comfort.
“When yields rise, that can take money out of the stock market,” says Leo Chen, a portfolio manager at Cumberland Advisors.
Read the full article at ThinkAdvisor.com