Back in late January and early February, there was a 10 percent correction in the S&P 500, with stock investors spooked as Treasury yield increases intensified with a monthly payrolls report showing the biggest wage gains for workers since 2009.
This time around, strong economic data worried bond investors, who sent the benchmark yield on Tuesday to 3.261 percent, the highest since early May 2011.
“A sustained rise in rates is probably reflective of improving economic conditions, so that in and of itself isn’t necessarily a bad thing for stocks,” said Willie Delwiche, investment strategist at Baird in Milwaukee. "Where it does get tricky for stocks is how fast they are rising. That’s where you get a similarity to what happened in January.”
The S&P was down nearly 4 percent in less than five sessions as of Wednesday afternoon. Still, that decline is from all-time high levels, so the market has not been knocked too far off.
Higher bond rates can weigh on stocks as they provide more competition for yield-hungry investors. They can also inhibit corporate borrowing.
(Graphic: SPX vs 10-yr yields in 2018 - https://tmsnrt.rs/2OfgQwI
Historically, according to Goldman Sachs, rising bond yields have not posed major issues for stocks as long as their ascent has been gradual.
For example, a yield rise in a month of one standard deviation or less, which would be 20 basis points currently, is manageable for stocks, Goldman said in a note last week.
But historically, a monthly move of one to two deviations, or 20 to 40 basis points now, would result in flat S&P 500 returns. A move of more than two deviations, or 40 basis points currently, leads to negative S&P 500 returns, Goldman says.
Since Sept 10, the yield on the 10-year U.S. Treasury note is up about 28 basis points, including a big spike last week. In the month before the S&P 500's correction in February, the 10-year yield rose 31 basis points, to 2.77 percent, making it an even bigger relative move since the yield at the time was at a lower starting point.
"The speed of changes in bond yields often matters more for equities than the level," Goldman Sachs strategists said in a note.
In only seven trading sessions this month, yields on 10-year U.S. Treasuries <US10YT=RR> have climbed about 18 basis points and crested over 3.20 percent, hitting their highest levels in more than seven years.
"The stock market in the U.S. has started to take notice, and will continue to, particularly if the speed at which rates rise becomes alarming," Jeffrey Gundlach, chief executive of Doubleline Capital, told Reuters last week.
gterm S&P 500 vs 10-year US Treasury yields - https://tmsnrt.rs/2ymjG8u
(Graphic: Bond sensitive sectors in 2018 - https://tmsnrt.rs/2ypxMpO
Other yield rises in the past decade have been faster and larger than the current one, including in 2009, 2010, 2013, 2015, 2016, and early 2018, according to Brian Reynolds, an analyst at Canaccord Genuity.
"The indications we look at lead us to conclude this is likely to be yet another brief pullback in the context of a 9.5-year bull market with another 3-5 years left to go," Reynolds said in a note.
In further evidence that stocks can rally despite rising Treasury yields, LPL Research found that in all 12 periods of rising 10-year yields since 1996, the S&P 500 ended the period higher than it began, according to senior market strategist Ryan Detrick.
(Graphic: 52-week highs vs lows on NYSE -
One concern is that stock and bond prices appear to be increasingly moving together, based on short-term correlations. Such moves are worrisome for investors, who could face sharp shifts in their portfolios if asset prices move in sync.
“It’s quite a challenge for stocks when there is no natural shock absorber from bonds,” said Nicholas Colas, Co-founder of DataTrek Research.
Graphic: S&P 500 and bond fund correlation - https://tmsnrt.rs/2OiOqSK
Compared to the start of this year, one aspect of current market conditions may be concerning.
Bets on market calm, measured by the number of contracts shorting futures for the CBOE Market Volatility Index <.VIX> compared to long contracts, are at a higher level than before the market correction, according to data from the U.S. Commodity Futures Trading Commission.
That is a potential sign of investor complacency.
: Short VIX contracts -- betting on market calm - https://tmsnrt.rs/2yrsSsj
(Additional reporting by Trevor Hunnicutt and Jennifer Ablan; Editing by David Gregorio)
By Lewis Krauskopf