Goldman Sachs Analyzes Stock Vulnerability to Rising Yields

Goldman Sachs Analyzes Stock Vulnerability to Rising Yields 

Two weeks ago, Tony Paquariello, a trader at Goldman Sachs and head of hedge fund sales, attempted to tackle a critical question in today's financial markets: when will rising interest rates start to negatively impact stocks, considering the significant increase in stock market valuation of $12 trillion since the lows in October? This question gains importance due to the noticeable contrast between rising bond yields and the soaring stock market in early 2024. Yields climbed from around 4% to 4.65%, while the S&P 500 index surged by as much as 500 points before a slight pullback in the past week.

Following a challenging week for the S&P, Goldman revisited this question, with Brian Garrett, a derivatives specialist at the bank, noting that the uptick in yields and the overall rise in rate volatility have caused significant turbulence in the equity market. Specifically, between April 1st and April 15th, the MOVE index, which measures bond market volatility (similar to the VIX for equities), surged by 27 points, one of the largest increases in over a decade. Unlike previous spikes in the MOVE index that stayed within the fixed income realm, this recent one pushed the VIX to its highest level since October 2023, coinciding with a sharp increase in bond volatility back then.

Goldman attempts to pinpoint the level at which higher 10-year US Treasury yields would start to impact stocks significantly. They suggest that a 2 standard deviation move in yields, roughly equivalent to a 60 basis point increase over a month, is when the impact becomes significant. Based on this calculation and the March closing yield of 4.20%, Goldman estimates that a move toward 4.80% would pose challenges for stocks.

Interestingly, as if following a script, 10-year yields approached 4.70% last week and again earlier this week. However, one might question whether yields can actually reach 4.80% if the market anticipates selling pressure at that level, potentially leading to preemptive buying of Treasuries before rates reverse, once again causing a shift in market dynamics.