Why Rising Interest Rates Won't Break the Bull's Run

Rising interest rates don't usually mean good things for economic growth or stock prices. The yield on the benchmark 10-year Treasury note closed at a nine-month high Wednesday and, sure enough, the following day, Freddie Mac revealed the average rate on 30-year fixed-rate mortgages hit its highest level since April 2010. The 10-year then ticked up again on Thursday, closing at 3.70%.

Homebuyers and CFOs alike know that higher rates mean lower borrowing and less spending. That acts as a drag on the economy, corporate profits and, by extension, share prices.

But the yield on the 10-year still has a way to go before interest rates start to hurt the stock market, reckons Jeffrey Kleintop, chief market strategist at LPL Financial. Indeed, for the time being, rising bond yields are actually good news for the stocks.

"The yield on the 10-year Treasury note has risen by about 1.25 percentage points to 3.65% from 2.39% four months ago," Kleintop writes in his most recent report to clients. "With yields now climbing towards 4%, investors are beginning to wonder when rising interest rates may start to negatively affect stock prices."

At the current rate, the yield on the 10-year note, which serves as the benchmark for everything from credit cards to home mortgages, could reach nearly 5% by the summer, a level last seen in July 2007. But it just so happens that rising yields should mean rising stocks prices, Kleintop says -- at least in the near term.

That because, historically, whenever the yield on the 10-year Treasury was below 5%, stock prices and bond yields rose together, Kleintop notes. It's only when bond yields hit 5% that stocks start to suffer (see chart).



"The reason for the different relationship above and below 5%, and why rising yields are good news for stocks right now, has to do with economic growth and inflation," Kleintop writes. "When yields were rising from a low level, they reflected improving growth and low inflation which was a favorable environment for stocks."

By the same token, when yields were rising above 5%, economic growth was accompanied by higher inflation, which threatened future growth. That hurt the present value of future earnings, which in turn tamped down share prices.

"As economic data continues to reflect solid growth in the coming months, bonds yields and stock prices are likely to continue their climb," says Kleintop. "The tipping point of 5% is still a significant distance away."

For now, the bullish case on stocks can be found in a seemingly unlikely place: a bearish-looking bond market.

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Dereck

Major Fraud Alert


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May 29 2011 at 1:25 AM Report abuse rate up rate down Reply
surfr45

Our socialist public educational system has indoctrinated our children into believing capitalism and freedom is bad and socialism is good. If Socialism is so good, why does the long time socialist government of Mexico boast of being the #1 producer of silver, plenty of oil, and the richest man in the world, yet 99% of their people are in the poverty level making an average of less than 6 dollars a day. Corruption is rampant. The evil, ultra rich see Mexico and want to implement socialism here, where they can have all of the wealth and power and the middle class will now be among the poor. That is what their Demoncrat puppets in the white house and senate are doing to us.

February 16 2011 at 6:30 PM Report abuse +1 rate up rate down Reply
jnelson983

10 years of misserably low intesy rates, as the Fed steals our future and future generations for their NWO buddies.......Ron Paul for president!
jeff

February 12 2011 at 10:56 AM Report abuse +2 rate up rate down Reply
bholt

WE ARE ABOUT TO GET SCREWED BY WALL STREET MANIPULATORS AGAIN. WE NEED TO TAKE THIS COUNTRY BACK. MAYBE EGYPT HAS THE RIGHT IDEA. EVERYONE SHOULD MAKE A PROFIT IN THEIR BUSINESS BUT BIG BUSINESS HERE IS RAPING AND STEALING FROM US.

FORM GAS AND OIL TO THE GROCERY STORE. STRIKEBACKAMERICA.COM HELP FIGHT BACK AMERICA !!!!!!!!!!!!!!!!!!!!!!

February 12 2011 at 10:49 AM Report abuse -1 rate up rate down Reply
1 reply to bholt's comment
jpc1108

bholt -- The reason the American people is about to be screwed again is not necessarily the Wall Street types, but EARS in the W/H. He has shut down oil exploration and oil production in the Gulf and other area of oil which would benefit America and not the Middle East Shieks. His vision of a green America is 20-50 years away. In the meantime, we need to drill until the Green revolution is a viable way of life. Yes we will suffer to some extent due to oil production/consumption, but it is a fact which will not change for years. There is only one thing between EARS left ear and right ear is a super ego. Any suggestion which is not socialistic travels the course of least resistance, from right to left with nothing in the middle. Oh, incidently, if I were to guess, you probably are on welfare have 5 - 10 kids, never held a meaningful job, etc., just want to blame someone for your lazy A##.

February 12 2011 at 11:36 AM Report abuse +1 rate up rate down Reply
kluj1

Bahahahahhahaha...too funny. When rates go down they say its great for stocks....yet everyone lost a boat load in stocks while rates were down and they have made nothing back even though the market is almost at itsa highs again....GE used to be 48 now its 20....bank of america used to be 50 now its 14...and th elist goes on.....NOW, rates are rising...and they tell the sheep that its good for stocks too....bahahahahhahahaha.....Dow 5000 in the near future people. Get safe!

February 12 2011 at 10:49 AM Report abuse -1 rate up rate down Reply
dannymad

If the rates for home loans does not go up the banks will not loan the money for homes. they will keep giving CC and car loan's they make as high as 22% with less risk.
When rate's go up home sales will go up, they banks will not lone for a home 75% of the time.

February 12 2011 at 10:39 AM Report abuse +1 rate up rate down Reply
tangxian6

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February 12 2011 at 7:06 AM Report abuse -1 rate up rate down Reply
1 reply to tangxian6's comment
wdwalker11

????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

February 12 2011 at 7:54 AM Report abuse rate up rate down Reply
Kleestard

Ah yes...Speculators are back!

February 12 2011 at 12:07 AM Report abuse rate up rate down Reply
richard

Ride the Bull, baby! Republicans, make up all the excuses you want, don`t give Obama any credit-it will be your loss!

February 11 2011 at 10:48 PM Report abuse -2 rate up rate down Reply
1 reply to richard's comment
tipcontrol

The Bull rides short. Watch as the devaluation comes. Preserve cash. But gold/silver. The REAL depression has yet to come. The government in their short sighted wisdom has created yet another bubble. The Federal Bubble. Worse than ever before. Profit now, sure you can. Keep your head low. Get out of debt. If the Government sees a run on gold they will outlaw your ownership in it just like in the '30's. Gold because of thousands of years of history is perceived to be real money, not the ever increasing worthlessness of paper money, make sure you own it very soon. These so called policies by Obama is just a continuation of trying to stave off dour economic times. Bush did it too!! The longer he pumps money into the system to "inflate" it the harder and deeper the fall.

February 12 2011 at 9:30 AM Report abuse rate up rate down Reply
Kleestard

They will get the little guy back on the table. Then it's LUNCH TIME.

February 11 2011 at 10:21 PM Report abuse rate up rate down Reply