Here’s how the stock market tends to perform when Treasury yields plumb new lows

This article was originally published on this site

A flight to the perceived safety of sovereign debt appears to be in effect, amid a raft of growing global political worries, but that doesn’t necessarily mean stocks can’t rally in tandem.

The 10-year Treasury note yield TMUBMUSD10Y, -5.53% at around 1.66% was flirting with carving out a fresh 52-week low point on Monday, below its recent nadir at 1.675% hit last Wednesday based on 3 p.m. Eastern Time levels for the benchmark debt, according to Dow Jones Market Data.

Bond yields fall as investors purchase fixed-income assets, driving prices of the debt higher.

Typically, falling bond yields coincide with equity markets tumbling, as has mostly been the case in recent market action. The Dow Jones Industrial Average DJIA, -1.06%, the S&P 500 index SPX, -0.85% and the Nasdaq Composite Index COMP, -0.70% all booked weekly declines last week, while the 10-year Treasury note finished trade firmly lower than it concluded the prior week on Aug. 2.

However, researchers at Bespoke Investment Group in a Monday research note say that the stock market doesn’t always track bond rates lower.

The researchers say that during periods where the 10-year puts in a 52-week low, there is a range of outcomes for the stock market, as the chart below shows:

Source: Bespoke Investment Group

Bespoke also tracks average forward returns for the S&P 500 in the day, week and months after new lows for bonds:

Source: Bespoke Investment Group

The upshot? It isn’t time to sell stocks but it also isn’t a buy signal either, though the data show a leaning toward higher markets over the longer-term period (see attached chart).

Check out: Here’s how the stock market tends to perform after a Fed rate cut

“The forward returns for equity markets are not exceedingly high, but it does go to show that bond rallies are by no means a massive sell signal that must be respected by equity market investors,” Bespoke’s analysts wrote.