Forex Flash: Tracing the impact of bonds on equities – Goldman Sachs

In practice the precise level at which bond yields start to impact negatively on equities is difficult to estimate. According to the Economics Research Team at Goldman Sachs, “A rise of 200 bp from current levels may be perceived very differently from such a rise when bond yields were at 5% or more. Ultimately, much will depend on the reasons why they are rising.”

Moreover, “If inflation expectations started to creep higher, or sovereign risk premia started to rise meaningfully, then we would expect the negative impact on equities to emerge at a lower level of rates. We struggled to find a recent example of rising bond yields damaging equity returns.” The only one we could identify was the February-March 2011 period when higher commodity prices, driven both by improving demand and supply disruption, pushed up bond yields as inflation expectations rose.

Equities started to fall as bond yields and inflation expectations were rising. This was when bond yields were about 3%-3.5%. Based on our growth and inflation outlook German bond yields rise to 3.0% only in 4Q 2016. It is difficult to conceive of bond yields rising to such a level over the next year without a significant rise in inflation expectations or a large pick-up in the perceived risks relating to government debt.