Tim Hayes, Chief Global Strategist at Ned Davis Research Group, addresses the question of when will rising interest rates threaten equities.
Hayes says that the key moment will be when correlations between market indices and bond yields turn from positive to negative. Currently, bond yields can be expected to rise in tandem with climbing stock prices for most of the world’s equity markets. However, Hayes points out that as bond yields edge higher, the number of inverse correlations will likely increase and the MSCI All Country World Index (ACWI) correlation with bonds will also turn negative (see Chart).
In fact, Hayes thinks that rising bond yields are already a threat to certain markets; eight markets have inverse correlation. Moreover, he says the ACWI Technology Sector is normally a good bell weather and, worryingly, the correlation between this sector and the Global Aggregate Bond Yield has decreased by 0.21 over the last year to its current level of just 0.05.
Read the full report.