S&P 500 Can Tolerate 10-Year Treasury Yields Above 5%, Bank of America Says
Despite recent increases, with the 10-year U.S. Treasury yield last above 5.21% and the 30-year Treasury yield above 5.5%, the S&P 500 remains only 1.4% below its recent high of 7,816.70 reached on August 13. Bank of America data indicates the 10-year U.S. Treasury yield must approach 7% before it meaningfully damages equity valuations, as S&P 500 forward price-to-earnings multiples have historically remained stable around 16 when yields trade within a range that includes 7%.
Historical P/E Multiples and Yields
According to Bank of America’s analysis dating back to 1986, the S&P 500 forward price-to-earnings multiples have generally stayed around 16 when the 10-year Treasury yield is between zero and 7%. However, the data shows these multiples drop to a median of 12.1 when the 10-year yield rises above 7%.
Recent Yield Levels
The 10-year Treasury yield, a key benchmark for mortgages, has been climbing, causing concern among investors. The yield was last above 5.21%, while the 30-year Treasury yield also surpassed 5.5% as of the report.
Bank of America’s Outlook
BofA rates strategist Meghan Swiber does not currently anticipate the 10-year yield reaching 7% in her base case. However, she believes We continue to see higher rates ahead
, attributing this expectation to anticipated interest rate hikes from the Federal Reserve, coupled with strong economic growth and increased inflation. She also stated that While supply-demand dynamics may add pressure, we do not see rates as restrictive enough yet to halt the move.
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Past 7% Yields
The 10-year Treasury yield last closed above 7% on July 8, 1996, reaching 7.06%. The firm remains short 2-year rates and recommends an underweight duration strategy.