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

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Lithium's rally is real this time – but no-one trusts it

The lithium rally mirrors the early-2010s tech stock surge, with demand set to double by 2030. Supply has been slow to respond, creating a market deficit for future tech like humanoid robotics and solid-state batteries.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Latest Updates

Are the government’s CGT changes better for young investors?

New CGT rules promise fairness, but could young investors lose out? A practical scenario reveals how changes impact deposit goals, investment choices, and long-term wealth building for the next generation.

Retirement

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Investment strategies

AI can’t pick winning funds, but it can help you avoid losers

Machine learning has been touted a game changer investment management. But a new study overturns claims that AI can generate positive alpha in mutual funds. Here are some practical takeaways for investors.

Investment strategies

Inflation BIG picture: Boomers got lucky, next Gen not so much

A 150-year view shows inflation's upward bias, driven by shifting monetary regimes and war stocks. This marks an end to the low-inflation boom that enriched boomers and ushers in a higher-inflation era for younger investors.

Planning

Tax deductibility of financial advice improves affordability

A shrinking adviser workforce and rising costs are squeezing access to financial advice, just as demand surges. Expanded tax deductibility offers a modest but meaningful boost to affordability.

Retirement

Retirement in reality – 3 months in

A reflection on travel mishaps, smart decision-making, time pressures and rebuilding health habits. Three months in, here's how to navigate the surprising realities of life after work.

Taxation

Calculating the business cost of Australia’s new 'productivity tax'

Amid a national productivity crisis, new economic analysis finds the tax changes in the 2026 Federal Budget create Australia’s first-ever by design 'Productivity Tax', where young people will pay the biggest price.

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.