• Credit Suisse has crunched the numbers and approximated the point at which US 10-year Treasury yields will start to weigh on equity returns.
  • The firm argues higher rates actually help stocks until a certain threshold is exceeded, at which point it’s open season for equity weakness.

Conventional wisdom suggests higher interest rates make stocks less attractive. As bonds offer higher yields, equities lose their appeal on a relative return basis.

Credit Suisse argues investors shouldn’t be worried about this dynamic — at least not yet. But the firm does warn of possible trouble ahead as the Federal Reserve prepares for further rate hikes.

The firm has crunched the numbers and found stocks have historically increased amid rising rates, as long as the 10-year Treasury yield stays below a specific level. At present time, that turning point is 3.5%, or roughly 60 basis points above current levels.

Put differently, once the 10-year yield climbs above 3.5%, Credit Suisse says all bets are off, since that’s the point where stocks will start to be negatively impacted.

The chart below shows the positive performance stocks have enjoyed since 2014 with Treasury yields at 3% or below. As you can see from the two negative bars on the right, the bank is projecting equity losses once yields start to exceed the aforementioned 3.5%.

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“Equities respond positively to rising rates until yields hit some threshold,” Credit Suisse chief US equity strategist Jonathan Golub wrote in a client note. “Our research shows that from 1991–2014, this threshold was 5–6%, but has declined to 3 1/2% over the past several years.”

The chart below goes further toward showing how Credit Suisse has arrived at the 3.5% Treasury yield that it says will prove a point of reckoning for stocks. The firm has drawn a trendline based on past S&P 500 performance on days when interest rates rose, and arrived at 3.5% as its key inflection point.

Screen Shot 2018 02 20 at 9.03.02 AM

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