Global stocks seem to have stopped relying on activities in bond market. The last few weeks’ turbulence on world equity markets was triggered largely by a slide in U.S. Treasuries that saw 10-year borrowing costs surge towards 3 percent for the first time in four years.
MSCI’s main gauge of world stocks was set on Friday, February 16 to post its best weekly performance since late 2011.
Rising bond yields typically price in rising inflation and, ultimately, interest rates. And a rising interest rate environment is often assumed to be negative for stocks, as higher borrowing costs slow the economy and earnings growth and tempt portfolio managers to switch back to bonds from equity.
But economists argue that historically, stocks and bond yields have often moved in tandem and that this is typical in a fast-growing economy. Higher growth and inflation keep investors wary of fixed income, support consumption by eroding household debt in real terms and increase corporate pricing power and margins.
After hitting record highs, world stocks sold off on Feb. 2, following higher than expected wage data in the United States.
The data stoked fears of a wage-driven pickup in inflation, which led to a selloff lasting for a week. This week however, stocks rebounded strongly in tandem with a rise in bond yields.
