Of course, stock ETFs’ reaction to rising rates will depend on exactly why Treasury yields are moving higher. Bonds are influenced by numerous factors, including the health of the economy, inflation expectations, Federal Reserve bond buying and views on the U.S. debt level.
“When interest rates are rising due to heightened inflation expectations, stock multiples tend to contract. However, when real rates are rising, particularly in the context of a strengthening economy, multiples have not been hurt,” Koesterich noted.
Today, weak growth is the greater threat to equity valuations, he warns. “While higher real yields probably won’t hurt multiples, earnings could be dampened if they rise high enough. However, given the fact that nominal yields are still close to a record low, and real yields remain negative, a modest backup in yields is not a major threat to stocks.”
In fact, Koesterich would be more concerned about stocks if rates fell further, a scenario that would probably be accompanied by another recession scare.
Yields on the 10-year note have been hovering around 2%. The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) was down 3.1% year to date as of April 16 but gained 5% for the trailing month, according to Morningstar.