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 growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

Sponsors

Alliances

© 2025 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.