What a 3% Yield on the 10-Year Treasury Means for Stocks

Current San Francisco Fed President John Williams, who will soon transition to the much more powerful New York Fed, sent a jolt through the bond market. In an interview in Madrid, he struck a hawkish tone, suggesting that the Fed may need to hike more aggressively due to tight levels of slack in the economy. This has sent the 10-year Treasury yield hurdling toward 3% again. Today we won't talk about Williams' argument specifically, since it isn't really new. He's been saying the same basic message for months. Rather, let's explore what a 3% 10-year means to markets and to the economy, what it would mean if it kept going higher.

Are rising long-term rates a problem for the economy? Or for stocks?

The way the media has been covering rates lately has probably given a lot of people the wrong impression about the relationship between interest rates and stocks, and I suspect it will lead to some trading mistakes. Yes, interest rates can certainly have an influence on stock valuations. At its core, a stock's price is the discounted value of future cash flows. If you have to discount those cash flows by a higher interest rate, then all else being equal, the stock is worth less. This was the same logic by which many argued that relatively high P/E ratios in the 2012-2015 period were justified: low interest rates can make a historically high P/E reasonable (or even cheap)....1125 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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