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With rising yield rates, investors might pick more equity shares

Since our coverage on the treasury yields a few days ago, the Fed has raised the 10-year yield rate to a quarter over 3%. The rate hikes could make investors pick up more stocks, but is it safe? Here’s a take.

Yield rates are on the rise. And anything and everything seems to be helping it. Let’s take US wages for example. A direct impact of a 3% hike in wages would push the yield rates to 3.30%. However, passing the 3.50% mark is still a question. Most probably, it will top out there.

Federal Reserve 10-year treasury yield rate rose to the highest rate in the last 7 years

Now, interest rates hikes often have a byproduct – volatility. And it might start if the markets start panicking on the Fed’s incessant rate hikes. Yes, the Renminbi is weakening, but the other strong currencies, led by Australian Dollar could push the US dollar down in the long term. But is it a possibility? That’s yet to see.

Now, let’s say the yield rate reached 3.50% mark. It is likely to send jolts through the free market. The yield rate will also push all the rates up automatically. And if the Chinese back away, especially now that we have a bull market, rates will shoot up further.

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The 10-year auction is coming up soon, and guess who a big buyer of US treasury bonds are – yes, the Chinese. How they will go about this in this situation is yet to be seen. We have a bull market, 10-year yield poised to hit 3.50%, and the Fed maintaining a strong position in hiking the rates.

Now, in this situation, another thing that might happen is the market outthinking itself. The rising rates will give way to increased borrowing costs. Incentivised investors will also go to riskier assets like equities. This will push the graph further up for the indices.

While there are many causes and effects of yield rate surges, it is also an indicator that we are now in a place of strong economic growth.

Is this growth sustainable?
The situations might be right, the reasons might be right. But if the rates go up in a faster pace, it won’t need much to trip and fall. Even in such a robust environment as we are now, many sectors might fall short.

The holiday quarter is upon us. Christmas is coming, and there is already a difficulty in hiring. This could lead to a disaster in the retail industry especially when we won’t have enough people to service the customers. Yes, it wouldn’t affect e-commerce, but the brick-and-mortar stores will see further decline.

NASDAQ Composite Index during stock crashes

Now, due to the incessant hikes, the market is convinced that the Fed will hike the rates again in December. But what if all the reasons might end up with another hike not happening? This is one of the things these rate hikes have brought upon.

S&P 500 during stock crashes

The face of it might be pretty, but beauty has to run deep. While the average indices are looking healthy, almost 20% of the stocks are already selling at 52-week lows. This can be seen as a discrepancy and an imbalance in the Advance-Decline Line (AD Line). But we all know that the market corrects itself.

Once the holiday quarter is done with, and if the corrections come into place, a lot of things would fall in line. And while the Fed looks to dare, the market might show them their place.

(DISCLAIMER: This is an opinion-based article based on the author’s views. AlphaStreet does not necessarily share the same views expressed in this article)

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