Treasury yields are likely to fall, but it may not keep stocks rising

Long-term Treasury yields are likely to fall by the end of the year, but it may not keep stocks and corporate bonds rising, according to Capital Economics.

But the situation is unlikely to hold, Hubert de Barochez, market economist at Capital Economics, wrote in a recent note. While Treasury yields may continue to fall, “we think that Treasuries’ relationship with corporate bonds and equities will break down in the near-term, before reasserting itself next year,” de Barochez said.

For corporate bonds, a further decline in risk-free rates could be offset by widening spreads, as economic conditions deteriorate, according to de Barochez. The equity risk premium, or the compensation investors can earn on stocks versus the risk-free U.S. Treasury rate, is likely to rise, meaning that the earnings yield also goes up, thus earnings per share would fall.

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