BCA Research Warns Sustained Real Yields Above 2% Growth Could Hit Stocks

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BCA Research says a prolonged rise in real Treasury yields above the economy's underlying growth rate could eventually pressure equities, even though U.S. stocks have historically held up well as bond yields rise. In a report dated October 5, chief U.S. investment strategist Doug Peta said the level of interest rates matters more for equity returns than their direction, noting the S&P 500 returned an annualized 9.9% when real 10-year Treasury yields rose at least 100 basis points, versus 5.5% when they fell by that amount, against an 8.2% annualized price return across all periods since October 1948. BCA estimates long-run potential growth at roughly 2%, compared with a real 10-year Treasury yield of 1.59% in August that could approach 2% once September price data are incorporated, and it does not expect higher real rates to materially hurt economic activity or corporate earnings unless they exceed potential growth for several months. The firm said the likeliest path to a stock-and-bond collision is a prolonged period of real Treasury yields above potential growth, and that investors should monitor small-cap earnings and credit performance, household delinquencies, and private-equity delinquencies and restructurings, since smaller companies rely more heavily on variable-rate loans while larger firms often access fixed-rate bond funding.

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