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Higher rates are beginning to overshadow the buoyant mood in stocks and corporate bonds.
More than half of fund managers polled by BofA Global Research in January say higher interest rates and less accommodative monetary policy marked the biggest danger that could derail the bull run in risk assets in the first half of this year.
“Combined with nascent speculation about the tapering of Fed asset purchases given the much more meaningful fiscal support that is forthcoming in the US, leaves investors acutely aware of the risk that higher rates pose to risk assets,” said Ralf Preusser, an interest-rate strategist at BofA Global Research.
That’s perhaps no surprise given the Federal Reserve’s huge role in backstopping markets since last March, arresting a sharp decline in asset values precipitated by fears around the pandemic’s economic impact.
Yet these concerns have gained ground following a sharp rise in long-term U.S. government bond yields in January, with the 10-year note rate TMUBMUSD10Y, 1.090% climbing over 20 basis points since the start of the year. Their rise has threatened to lift borrowing costs for rate-sensitive corners of the economy and potentially sap the relative attractions of risky assets.
So far, equities have mostly shrugged off the modest climb in rates. The S&P 500 SPX, -0.61% and Dow Jones Industrial Average DJIA, -0.47% are still holding on to modest gains this month, a period that also saw equity benchmarks touch fresh record.
See: Here’s where the market sees the U.S. 10-year Treasury yield headed next
Still, yields could have further room to run higher and tighten financial conditions, with fears growing of another “taper tantrum,” a reference to how former Fed Chairman Ben Bernanke’s mere suggestion of a possible tapering of its asset purchases sent bond yields spiraling higher.
Atlanta Fed President Raphael Bostic and some senior Fed officials alluded to the possibility of easing the central bank’s pace of asset purchases if the economy recovers faster than expected this year.
But recent guidance from Fed Chairman Jerome Powell and other members of the Fed Board of Governors suggested such talk was premature.
Read: U.S. bond market could face ‘taper tantrum’ risk after Georgia Senate runoffs, says Jefferies
