US Stocks Defy Rising Yields Amidst Interest Rate Hikes

The US stock market has been surprisingly resilient in the face of a sharp surge in US Treasury yields, which have pushed borrowing costs to their highest levels in nearly two decades.

Rising bond yields are expected to impact the stock market through several channels, including increased borrowing costs and investors becoming more cautious when allocating capital to high-risk equity assets.

A look back at historical trends reveals that the patterns have always been intricate, with the rise in US Treasury yields not necessarily leading to a decline in US stocks. In fact, during the last five similar episodes of sharp spikes in US Treasury yields, the performance of US stocks was quite different.

In 2022, US stocks plunged sharply as investors were caught off guard by the Federal Reserve's aggressive interest rate hikes. The S&P 500 index entered a technical bear market that year, and the market value of constituent companies in the MSCI ACWI index evaporated by about $18 trillion within one year.

However, other episodes saw US stocks rallying sharply or showing resilience against pressure. For example, during the 2016 bond sell-off, yields and the stock market rose in tandem as investors welcomed the signal that the economy was likely to get back on track.