Could Bond Yields Break the Stock Market?

SPEAKER_1 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Michael Regan (0:08)

We're just like swinging between fear and greed every day based on the latest headline, you know.

Sarah Holder (0:12)

Where are we today?

David Papadopoulos (0:13)

Mike plays fear, I play greed.

Michael Regan (0:16)

Today we're fear, yes, today we're fear. Does he look fearful?

Sarah Holder (0:22)

I'm Sarah Holder, and this is the Big Take from Bloomberg News.

Today on the show, could the bond market break the stock market? And will the AI trade keep delivering? I sit down with Bloomberg Executive Editor, David Papadopoulos and Managing Editor for Equities, Mike Regan, to pick apart the economic indicators we're seeing right now, and where they're headed.

David Papadopoulos (0:48)

Well, one of the things we've seen of late is the real big spike up in bond yields across the globe, and definitely here in the US in treasury bond yields, they've gone quite a bit higher over the past month or so, which has got some people starting to worry that that could break the stock market, because if you can get higher returns, now north of 5 percent on many US. Treasury bonds, well, heck, why do I need to take all the risk and buy stocks?

Sarah Holder (1:22)

Break the stock market. That doesn't sound good.

Michael Regan (1:24)

I mean, I think that's a fair concern. Now, the only issue is every time you see that yield go up a little bit, if you own that bond, that means the value of your holding goes down a little bit. So I think what the market is doing right now is trying to figure out, how high is this yield going to go? When is it safe to jump in with two feet and start buying bonds?

David Papadopoulos (1:43)

Yeah. Sarah, on that point, that last one's very important.

The last five years for bond holders in the US., it's been brutal.

I mean, 2022 was a total wipeout. It was when the Fed suddenly said, holy smokes, we have a major inflation problem coming out of the pandemic. They started raising rates at a breakneck pace. And as Mike was saying, when rates are going up and bond yields are going up, the price of the bond collapses. So honestly, Sarah, from that period to now, if you just have held a 10-year treasury bond or a 30-year treasury bond, you're still down money because you took such a loss on the price side. So yes, people are seeing those yields go higher and higher. And at some point they're saying, hey, I'm gonna jump in and just take that 5% yield or that 5.5% yield. But I think some of them have indeed been a little bit spooked that is this the right moment to jump in or are they gonna keep going higher? Anyway, when I say break the stock market, it's just this idea that are you getting to the point now where yields on bonds are so attractive that, hey, I don't want to worry about stocks and what could happen to the economy in a recession. I just want to put my money in a 10-year treasury bond, clip 5%, 5.5% and take it to the bank.

Sarah Holder (3:02)

Is that happening, though? That is the typical way that things happen, right? People see higher yields on bonds, stocks get less attractive, they reallocate. Is that what you're seeing right now?

Michael Regan (3:12)

So yeah, this is not a theoretical discussion right now. This is the discussion that's happening, I think, with financial advisors, with pension funds, with asset allocators. Is it time to sort of shift our ratio? We had a really interesting story out this morning, looking at some research from Wells Fargo, and they pointed out that investors allocation to equities is at 72% and you assume, okay, the balance is mostly bonds.

That's the highest, I think, since like 1969 It's the highest in a long time. Invested in equities, then it's been in decades. Here, that 60-40 ratio is the ideal, 60% stocks, 40% bonds. Actively on Wall Street, there are some strategists saying, advising their clients, time to shift your allocation a little bit, a little bit more into the bond market, a little bit less into the stock market.

David Papadopoulos (4:06)

One other way to think about this question of when is it right to move out of stocks and into bonds is the issue of like, I think the bond market, part of what's going on is the bond market is simply catching up to the fact that the US economy continues to grow at very high rates. Coming out of the pandemic when the economy, given all that fiscal stimulus, all that monetary stimulus that was pumped into the system back then, the economy really is almost kind of never cooled off from that moment. You throw in the AI boom, which is a huge part of what's going on right now, and that's just sort of further added to it. So, I could get five, five and a half percent on a treasury, but you still actually, once you do the math of among other things, once I factor in inflation and then the taxes I have to pay, you're still actually not doing great. This economy remains hot for sure, which is part of the reason why Kevin Warsh at the Fed and his colleagues raised interest rates a couple of weeks ago now.