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  • Writer's pictureRobert Baharian

The Facts About Rising Rates & Stocks

If 2020 wasn't wild enough for investors, welcome to 2021. From one extreme of lower rates for longer, to inflation fears and rising interest rates, investors have their work cut out for them.

Expectations of an economic rebound are rising on the back of money printing, government spending, and pent-up demand. In turn, long-term interest rates are rising. This has implications for other assets from stocks to housing - stuff just costs more. But how high is too high? No one really knows. But let's look at the facts.

Here are rates for the 30Y, 10Y, 5Y, and 1Y US Treasuries since 2009. That dip U shape on the far right is what everyone is talking about. Rates collapsed due to COVID as the global economy was literally shutdown and the bond market was pricing yields accordingly. Here we are today, no longer starring down the barrel of total doom and gloom. Where did you actually think rates were going to go from here? Longer rates are pricing in a healthier economy, and the yield curve is looking quite normal - isn't this what we've been yearning?

Let's take a closer look. I've charted the above Treasuries from 01/01/2020 to today. Take a look at what's been happening. You don't need me to explain this to chart to you - longer dated Treasuries are simply rising back to where they were pre COVID.

As unprecedented these moves appear, here's what the 2021 bond moves look like when compared to each and every year since 1980. If you can read a chart you can see we've been here before. The moves thus far are very similar to the moves of 1980 and 2009 - the two largest losses. In fact, it's the third biggest loss we've seen in the last 41 years. And when we have years such as the one in 2020, did you really think 2021 wasn't possible?

Are higher rates bad for everything? Who knows? We've never been here before, I mean, rates rising from zero. Notwithstanding this, I decided to crunch the numbers and I looked at the return of both long-term Treasuries and the stock market each and every calendar year since 1926. You can download the entire data series here. The data is sorted from largest losses to gains in long-term bonds.

Periodic Returns
Download XLSX • 21KB

Here are the top 10 biggest losses in the Long-Term Government Bond market since 1926 and the corresponding return in the stock market. I've also added the long-term rate at that time as well as CPI.

Source: Returns 2.0, Robert Shiller Data

Although this table is summarised at a point in time (at the end of the year), the ride is something very different as I illustrated in the table above. Although 1980 and 1990 were the two worst years 3 month into a calendar year, interestingly 1980 ended the year nowhere near 2009. If 2021 is going to be anything like 1980 or 2009, I'll take it any day. Stocks were up 32.41% and 26.46% respectively.

We can look at these things in either relative or absolute terms. However you want to craft your narrative, what this table shows us is that we have seen large moves in the long-term bond market before, this is nothing new. In fact, in all 10 years the bond market lost money, the stock market was up 80% of the time.

What history tells us is that stocks actually do well in a rising interest rate market, probably because the market is pricing in a better economy. Before you get caught up in all the bullsh*t that is being peddled by folk who make money by scaring the sh*t out of you, take a look at the facts - not the opinions.


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