Academic literature would suggest yes, because they are an input in the process of valuing stocks. Shareholders are part owners of that business, which entitles them to a portion of its future profits. To assess the current value of those future profits (typically dividends), and hence value the company, investors often discount the expected cash flows back to today, using a discounted rate.

Since government bond yields often serve as a proxy for the risk-free rate used in calculating the discount rate, higher bond yields mean a higher discount rate is applied to those future profits. And so, all else being equal, the maths leads to a lower valuation for the company – although the reality is that all else is almost never equal.

Most equity investors would not have lowered their estimate of the risk-free rate to match bond yields as they fell to historic lows, hence limiting the need for increases as bond yields start normalising. Also, since bond yields were driven lower amid fears of deflation, another component in the discount rate calculation, the equity risk premium, rose due to fears of slower economic growth and declining company profits.

As these fears recede, it is possible that investors require less compensation to invest in equities, which would be good for the asset class. And finally, since higher bond yields could be a sign of a strengthening economy, the actual impact on share prices will be influenced by the relative movement between bond yields and company profit growth.

So, as is often the case with investing, trying to answer the question is both science and art.


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