U.S. Treasury yields have surged, with the 10-year yield surpassing 5.21% and the 30-year yield exceeding 5.5%. This increase raises concerns for investors, as higher bond yields can make equities less attractive due to the potential for better returns in bonds and the impact on future corporate profits, particularly for growth companies.
Despite these high yields, the S&P 500 index remains close to its record high, only 1.4% below the peak of 7,816.70 reached on August 13. Historical analysis from Bank of America indicates that the S&P 500's price-to-earnings multiples have remained stable around 16 when the 10-year yield is between 0% and 7%.
It is only when yields exceed 7% that the multiples drop significantly to a median of 12.1. The last time the 10-year yield was above 7% was in July 1996.
BofA rates strategist Meghan Swiber does not anticipate the 10-year yield reaching 7% but acknowledges that expectations of higher interest rates from the Federal Reserve, along with strong growth and inflation, will continue to exert pressure on the bond market.
She notes that while supply-demand dynamics may influence rates, they are not yet at a level that would significantly disrupt the market. BofA recommends maintaining a short position on 2-year rates and suggests staying underweight duration in portfolios