INSUBCONTINENT EXCLUSIVE:
New York: With the yield on US 10-year Treasuries surging to their highest level in nearly seven years, investors are starting to wonder
what will be the threshold triggering a big rotation out of equities and into bonds
Credit Suisse Group AG says we’re getting dangerously close to the level, yet yields could stall for a while.
This year’s rise in the
yield — trading at 3.08 per cent on Wednesday — has derailed the stock market rally in both the US and Europe, sparking worries over
corporate borrowing costs and making the equity asset class less attractive than fixed-income assets overall.
“Treasury yields at 3.5 per
cent would push people out of stocks and back into the Treasuries,” Michael O’Sullivan, chief investment officer for International
Wealth Management at Credit Suisse in Zurich, said in a phone interview
O’Sullivan, who helps oversee about 760 billion Swiss francs ($758 billion) in invested assets, said the exodus from equity funds hasn’t
started yet, but should become visible when the yield reaches 3.2-3.3 per cent.
Bond yields have been advancing this year, lifted by robust
US economic data as well as by worries over a potential pick-up in inflation and the pace of US Federal Reserve rate increases
The move has rattled equity markets, in particular sectors seen as bond proxies such as telecoms and utilities.
While most investors expect
higher rates this year, the debate has shifted to the extent of the advance, with JPMorgan Chase Co’s Jamie Dimon and Franklin Templeton
suggesting yields are heading toward 4 per cent
According to the latest fund manager survey from Bank of America-Merrill Lynch, asset managers are waiting for the yield to hit 3.6 per cent
to reallocate from stocks to bonds.
While the yield seems unstoppable at this point, Credit Suisse’s O’Sullivan sees a pause in the
coming months as investor focus is set to shift toward risks such as the US fiscal deficit
This should limit the upside in the yield to around 3.2 per cent this year, while the US dollar should fall back.
