Why rising bond yields causing pain to stocks

US Treasury bond yields spike and the Dow Jones mini-crash

The Trump administration's de facto weak dollar policy may be exacerbating market volatility. As a result, investors should consider selling global bonds in general. The deal looks set to increase the US federal deficit and may stimulate inflation, encouraging the Federal Reserve to hike up interest rates quicker than anticipated. The recent tax bill has forced the Treasury to borrow more money, which will put more bonds into play.

Instead, Trump set himself up for failure by touting the stock market's rise, Schiff said.

Wall Street is pointing towards a weaker session, with US stock futures down a quarter percent and investors seeing the potential for higher inflation and borrowing costs.

Ken Mahoney, president of Mahoney Asset Management, said he has been hearing from clients this week who were surprised by the struggles for bonds. "We're going to continue to see volatile days", said JJ Kinahan, chief market strategist at TD Ameritrade.

"With expectations running high, we think the sell-off may have further to run and we reduced our exposure to equities in our multi-asset funds on 29 January, although we still remain overweight stocks", Greetham added. That raised concerns that inflation may be on the way up, which could force the Federal Reserve to increase interest rates more quickly than expected. "They won't be able to provide that nice predictability and certainty that they provided ever since they started the rate hikes a few years ago".

"This will be bad for bonds and mediocre for equities". Investors worry that businesses' profit parade will slow down. The Fed is raising short-term interest rates and reducing its large holdings of bonds. But such calm is unusual, and stocks overheated.

The bull market has feasted on extremely low bond rates. Going back to 1980, the index has had a loss about 20 percent of the time, or one in five quarters.

"The pace really does matter", said Ron Temple, Head of US Equities and Co-Head of Multi Asset Investing at Lazard Asset Management in NY.

"A strong currency keeps a lid on inflation, which in turn helps keep interest rates low", she said.

And "that's OK", he said.

The S&P 500 index witnessed its most traumatic week since January 2016, when fears over China's yuan devaluation and a plunge in Brent crude below $30 led to a 15 per cent fall in the bellwether USA stock market index. Higher bond yields also dampen demand for stocks because the comparative dividend yield is less attractive, meaning that investors can get decent relative returns from safer government bonds. Companies are healthy, and investors have rewarded them by pushing up their stock prices.

We already knew that high market valuations were likely to exacerbate volatility, as was the absence of any meaningful pullback in all of previous year.

Rising yields challenge equity prices and make investors reassess valuations.

Kotak Institutional Equities in a recent note suggested that the market was overlooking the rising yield on some "misguided view" about earnings and macro-economic factors being less relevant to the equity market against ample global liquidity. It is too early to speculate if the United States dollar will be sustained by a "safe haven" panic flows from Europe and Japan, as happened just after the failure of Lehman Brothers in 2008.

Debt needs may rise further after U.S. Senate leaders reached a deal on Wednesday to raise spending on military and domestic programs by nearly $300 billion over the next two years that will add to the deficit. Things may get rockier down the road, but for the foreseeable future, equities should still rise, albeit not in a straight line.

The next big test for the bond and stock markets could be on Valentine's Day, when the government releases its next monthly update on inflation.

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