There’s a Bogeyman that’s creeping up on the market but investors are looking the other way. I am talking about US government bond yields which influence just about everything on the ASX. The 10-year Treasury yield has again breached the psychologically important 3% market in overnight trade and is holding above that level this afternoon. Investors should be paying attention as the rising global benchmark yield threatens the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) bull market in two ways and is arguably more a threat to our market than US equities. The first impact of higher yields is on stock valuations…
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There’s a Bogeyman that’s creeping up on the market but investors are looking the other way. I am talking about US government bond yields which influence just about everything on the ASX.
The 10-year Treasury yield has again breached the psychologically important 3% market in overnight trade and is holding above that level this afternoon.
Investors should be paying attention as the rising global benchmark yield threatens the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) bull market in two ways and is arguably more a threat to our market than US equities.
The first impact of higher yields is on stock valuations as the fair value of shares will drop (both move in opposite directions). Our market is already looking close to full value with well-loved but expensive growth stocks like CSL Limited (ASX: CSL), Afterpay Touch Group Ltd (ASX: APT) and Cochlear Limited (ASX: COH) trading on high price-earnings (P/E) multiples.
The other risk of higher yields is rising funding costs. This is particularly an issue for our big banks like Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) as due to their reliance on offshore markets to fund their operations.
There are a few reasons why US investors may not be as worried about the 3% breach this time around compared to April this year when it temporarily spiked above this level before retreating back under.
Firstly, the US stock benchmarks like the S&P 500 have rallied with Treasury yields in the latest period. Our market has also largely done the same.
However, the complacency of US investors may be due to inflation with Bloomberg noting that the “real” yield (the difference between the bond yield and inflation) is pretty subdued. That may be the case in the US where inflation is making more of a pronounced comeback, but I don’t think the same can quite be said about Australia.
The thing is, all markets reference the US Treasury market regardless of local inflation. So, while US investors can be sanguine about rising yields, I am not sure ASX investors should be.
Another point of difference between US shares and ours is revenue and earnings growth expectations. Corporate America is tipped to deliver 20% plus earnings per share (EPS) growth in the June quarter and some experts believe the good times will roll on as revenue could grow by around 12% to 14% over the year.
We have recorded some decent results in the August reporting season but FY19 expectations for our market are more subdued.
What all this means is that we are likely to feel more pain from higher bond yields than our friends in the US, and that’s why we should be paying more attention to the Treasury market than US investors.
This doesn’t mean we should ignore some great buying opportunities in our market. The experts at the Motley Fool have picked three of their best blue-chip stocks to beat the market in FY19.
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Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO and Australia & New Zealand Banking Group Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.