Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 115

Rising bond rates should be good for shares

There is a widely held belief, supported by theory, that rising bond yields should be bad for share prices. But is this true in real life? Just about every stockbroker and security analyst in the world today uses valuation models driven by discount rates based on long term government bond yields. The implication is that, all else being equal, a rise in government bond yields (which drives discount rates) should result in a fall in asset values.

The problem of course is that all else is never equal. Rising bond yields are usually the result of rising expectations of future interest rates and/or rising expectations of future inflation. The factors that drive these expectations are often also driving expectations of increased economic activity which, to varying degrees, may be expected to flow through to higher company revenues, profits and dividends. As a result, the relationship between government bond yields and share prices is more complex than it first seems.

This article studies all 27 bond yield spikes in the US market since World War II and their impacts on share prices. A subsequent paper will look at the Australian market.

Figure 1: US 10 year Treasuries and S&P500 share price index since 1980

(Click on the figure to enlarge it and see the detail better).

Statistical relationship bonds and shares

Bond yield spikes on the whole have had no consistent impact on, or statistical relationship with, share prices in the US market, either in the rising inflation phase (1946-1981) or in the disinflation phase (post-1981). It is notable that:

  • Around half of the US bond yield spikes since 1946 were accompanied by rising nominal share prices during the yield spike. (57% during the 1946-1981 rising inflation phase, 62% during the post 1981 disinflation phase, and 59% overall)
  • Around half of the bond yield spikes since 1946 were accompanied by rising real share prices during the yield spike. (43% during the 1946-1981 rising inflation phase, 54% during the post 1981 disinflation phase, and 48% overall).

This is shown in the following pair of charts that plot changes in bond yields during bond yield spikes versus nominal share price moves during the yield spike (left chart), and versus real share price moves during the yield spike (right chart). They show no clear relationship between the magnitude of the yield spike and share price returns during the spike:

AO Figure2 260615

Level of nominal bond yields at start of rate rise

What does make a difference to share price returns during bond yield spikes is the level of nominal bond yields at the start of the yield spike:

  • all of the bond yield spikes that started when nominal bond yields were low were accompanied by high nominal and real returns from shares during the spike; and
  • all of the bond yield spikes that started when nominal bond yields were high were accompanied by low nominal and real returns from shares during the spike.

This pattern has been consistent in both the rising inflation phase and also in the disinflation phase.

The next pair of charts shows this moderately strong negative relationship between the nominal bond yield at the start of the yield spike versus nominal share price moves during the yield spike (left chart), and versus real share price moves during the yield spike (right chart):

AO Figure3 260615

Current yield spike: When the last bond yield spike started in July 2012, the nominal bond yield at the start was an extremely low 1.43%. In all prior yield spikes since 1946 that started with nominal yields at very low levels, share prices have risen strongly in both nominal and real terms during the bond yield spike. This is the case once again during the current yield spike, as we are still bullish on US equities. (Editor’s note: this paper was written in March 2015).

Potential for favourable share returns

There are some reasonable indications that share returns are likely to be favourable during the current bond yield spike. Specifically:

  • Rising bond yields that start when nominal bond yields are low (which was the case at the start of the last bond yield spike and also the case now) have consistently been accompanied by high nominal and real returns from shares during past bond yield spikes. This has been the case through all types of market conditions and inflationary environments during the post-World War II era.
  • Rising bond yields that start when the CPI inflation rate is low (which was the case at the start of the last bond yield spike, and is still true now) have consistently been accompanied by high nominal and real returns from shares during past bond yield spikes. This has also been the case through all types of market conditions and inflationary environments during the post-World War II era.

At least we can say that historical precedents provide no warnings of poor returns, as poor returns have occurred when nominal bond yields and/or CPI inflation rates are high during the yield spikes, and neither is the case at present.

We wrote an original paper on this subject warning of the last yield spike in 2012, and the S&P500 index of US stocks indeed rose by 40% between when yields bottomed at the start of that spike to the last day in December 2013 (bond yields rose by 1.61% to 3.04%).

This is consistent with the patterns over the past seven decades through a wide variety of inflationary conditions, and this provides support for our relative bullish stance on US shares over the period, in the face of rising bond yields.

 

Ashley Owen is Joint CEO of Philo Capital Advisers and a director and adviser to the Third Link Growth Fund. This article is for general educational purposes only. It is not personal financial advice and does not consider the circumstances of any individual.

 

  •   26 June 2015
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Why have bond fund distributions been shrinking?

Long-term rates have soared, but is fixed or floating best?

Why 'Don't fight the Fed' now has a different meaning

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

Latest Updates

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Superannuation

The Division 296 tax is still a quasi-wealth tax

The latest draft legislation may be an improvement but it still has the whiff of a wealth tax about it. The question remains whether a golden opportunity for simpler and fairer super tax reform has been missed.

Superannuation

Is it really ‘your’ super fund?

Your super isn’t a bank account you own; it’s a trust you merely benefit from. So why would the Division 296 tax you personally on assets, income and gains you legally don’t own?

Shares

Inflation is the biggest destroyer of wealth

Inflation consistently undermines wealth, even in low-inflation environments. Whether or not it returns to target, investors must protect portfolios from its compounding impact on future living standards.

Shares

Picking the next sector winner

Global equity markets have experienced stellar returns in 2024 and 2025 led, in large part, by the boom in AI. Which sector could be the next star in global markets? This names three future winners.

Infrastructure

What investors should expect when investing in infrastructure: yield

The case for listed infrastructure is built on stable earnings and cash flows, which have sustained 4% dividend yields across cycles and supported consistent, inflation-linked long-term returns.

Investment strategies

Valuing AI: Extreme bubble, new golden era, or both

The US stock market sits in prolonged bubble territory, driven by AI enthusiasm. History suggests eventual mean reversion, reminding investors to weigh potential risks against current market optimism.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.