Danger lurks in world markets transmitted by rising bond yields

Just as an all-rally drives records in the S&P 500 and inflates risk assets, the bond market gives investors a warning signal that a rapid economic upswing poses its own dangers.

Treasury yields have risen to the highest level since the early days of the pandemic, as the vaccination of the vaccine and the potential for another major US stimulus package revived animal spirits and the prospect of inflation. But years of almost zero rates and a historical debt overruns have left both equities and bonds particularly vulnerable to deep losses as yields climb too far in a growth outbreak.

The risk is based on cost, which is now almost a record, as debt issuers worldwide tend to sell after longer maturities, and coupon payments fall or evaporate. Trillions of dollars are at stake, given the high levels in both stocks and bonds – and some fear a repeat of the tapered tantrum in 2013 when then-Fed chairman Ben Bernanke caused a surge in returns after proposing that the central bank can start reducing the asset purchases.

“There are more time risks embedded in the markets than many people may realize,” said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle.

As benchmark benchmark measures flank records, investors can expect larger losses due to higher returns. This is a risk that has wider repercussions, as many stock viewers warn that stocks are not immune, and especially techies.

There is already a bit of pain. After two years of gains, the Bloomberg Barclays Global Aggregate Treasury Index turned a loss in 2021, with its maturity just below a record high. Given the level and the approximately $ 35 billion stack of bonds that follow the index, each percentage point increase in returns would mean approximately $ 3 billion in losses.

What makes matters worse, Tannuzzo says, is an aspect of securities mathematics embedded in many securities, which stipulates that as yields rise, their duration will also move higher. This is mostly due to something called negative convexity – which also means that the prices of bonds will fall faster and faster as rates rise.

The duration of the shares is a little harder to grasp. Some use dividend yields to calculate how many years it will take to get its capital back without any dividend growth, with more time equating to a higher duration – in general, a lower dividend rate means a higher duration.

Vulnerable technologies

Growth stocks, which are strongly represented by technology companies, are an example of this. Rising returns will be a big hit on discounted values ​​of their cash flow, many of which are expected in the future. And the weight of technological stocks in the major stock indices is greater than during the technological bubble of the late 1990s.