WHY ARE YIELDS RISING?
Yields are rising due to the expectation of global synchronised growth as we emerge from the ashes of the COVID. Economists at Goldman Sachs are expecting 6% in 2021; the strongest in 30 years – oooft!
WHY IT IS BAD FOR STOCKS:
Higher yields erode the value of future cash flows, making assets less valuable when discounted back to today. Therefore, those speculative equities with a higher ‘proportion’ of their cash flow generated in the future are going to feel the pain (e.g. 2025 and beyond). You know the names that teenagers have been YOLO’ing deep leveraged OTM call options on.
WHY IT MIGHT BE GOOD FOR STOCKS:
blockquote> The best returns have actually come when we have low inflation + bond yields together and then begin to tick up due to stronger growth expectations – all while rates are low enough to support risk assets. A pick up in growth is also supportive for cyclicals with the highest operational leverage- meaning the velocity of their earnings will rise relatively more than other industries. Forecasts are for a 30% increase in corporate profitability, dividend growth, more fiscal liquidity and with yields still historically low the backdrop for broader equities is still favourable.
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