New analysis suggests probable negative impacts on bond yields but increases to P/E multiples on S&P 500
In a new report produced for S&P Capital IQ's LCD group, Wall Street leveraged finance specialist, Marty Fridson, delves into a question on many investors' minds about the likely impact on major asset classes of a sharp rise in Treasury bond yields -- a question significantly amplified by recent Federal Reserve statements of possible tapering in purchases of long-term debt obligations.
From an analysis of the historical relationships between the yield curve and valuations on four major asset classes, Fridson estimates that if the 10-year Treasury yield rises to 4% while short-term interest rates remain unchanged, the option-adjusted spreads on high-yield bonds and investment grade corporates will widen to levels last seen in September 2009. The impact on stocks could actually be moderately positive with the P/E multiple potentially rising from 15.62 to 17.36. The level reached by the S&P 500 would also depend on the earnings to which that multiple would be applied.
"The leveraged loan market's floating-rate nature will represent a comparative advantage as its three-year yield rises by 295 basis points under our assumptions," says Fridson, CEO, FridsonVision LLC and consultant to S&P Capital IQ's LCD group. "All of these outcomes will depend on other factors, such as economic conditions and the expected level of corporate earnings, but investors should not underestimate the significance of an extremely unusual yield curve."