Last week we wrote about low US real yields and their a priori impact on growth stocks. From a theoretical perspective low interest rates causes an exponential impact on market valuation of companies with a stable growth trajectory and low variance in future cash flows. We used Microsoft as an example to show how the market was increasingly pricing technology stocks as bond proxies. In today’s research note we broaden our analysis of US real yields and show how they impact asset classes but also how sensitivity changes for technology stocks depending on the changes in real yields.
The average response shows no link between rising equities and falling real yields
When we measure daily changes in the US 10-year real yield (US 10-year yield minus US 10-year breakeven yield) against a variety of asset classes we observe the expected sensitivities to changes in the real yield. When the real yields decline gold rises, USDJPY declines and EURUSD increases. Equities across the board have a positive sensitivity to changes in the real yield which fits with the hypothesis that rising real yields are a positive sign for economic growth and thus equity values.