The Week Ahead: Will The Interest Rate Surge Continue?
Jeff Miller | Jun 02, 2013 05:56AM ET
Since 2008 investors have preferred bonds to stocks. When the valuation difference became compelling, the stock rebound was led by defensive sectors – anything with attractive yield. We are now at a crucial point in this trend. Last week's spike in long-term interest rates has driven the ten-year yield back above the dividend yield on the S&P 500 for the first time since 2011. Abnormal Returns discusses the rarity of this situation, noting, "This relative yield argument has been used by many to get investors to jump back into stocks." See the advice from Eddy Elfenbein :
This leads me to think that higher long-term rates signal growing optimism for the economy. The U.S. dollar has also been doing well. Remember that financial markets tend to lead the economy by a few months, so the strength for the economy hasn't shown up just yet.
For now, I encourage investors not to be rattled by any short-term moves. We've had a long stretch of low volatility, and those don't last forever. Get used to seeing higher interest rates.
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