Goldman Sachs said in its recent communication on Tuesday that although the relationship between bond interest rates and stock markets is complex and not stable, higher bond interest rates influence stock markets.
The financial institution indicated that at present, as pressures from falling inflation ease, the relationship between bond interest rates and stock markets is expected to reverse.
The company has identified five elements that influence the interaction between bond interest rates and stock markets. First, she observed that historically, 10-year U.S. Treasury interest rates around 5% or inflation-adjusted interest rates above 2.5% have been detrimental to markets scholarship holders.
“Stock markets tend to be less affected early in the business cycle, when interest rates rise from lower levels and economic growth typically recovers from a low point,” the financial institution explained .
Furthermore, they emphasized that the more gradual the change in interest rates, the better stock markets can handle, while considering that stock pricing is important, with lower stock prices and higher premiums for stock market risk making stocks less sensitive to any increase in bond interest rates.
“Current high stock prices make them more sensitive to increases in bond interest rates from current levels,” the financial institution added. “The distinction between inflation-adjusted interest rates and nominal interest rates has an effect; increases in interest rates due to inflation are often easier for stock markets to manage.
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