Skip to main content

You are here

Blog Listing Page

Interest rates are on the move: what is the impact on equities?

By Tom Goodwin, senior research director

So far, 2018 has been characterized by an upward move in interest rates with some volatility around that trend. In March, the 10-year Treasury yield exceeded 3% for the first time in almost five years. This worries some equity investors who view higher interest rates as a threat to equity markets. That threat has yet to materialize, as we will show in this post, and we will also offer some reasons why from our Global Markets Research team.

Charts 2, 3 and 4 look at the daily relationship between movements in 10-year Treasury yields and daily equity returns by global region, cap size and style. The bars represent the year-to-date sums of daily equity returns on days when the 10-year yield rose and days when it fell. There is a clear pattern in these charts: on days when the yield rose, equities tended to rise as well and vice versa on days when the yield fell.

Why the positive correlation?

The positive correlation between interest rate changes and equity returns this year is counter-intuitive to many market participants. A textbook way to price a stock is to estimate future earnings and “discount” them by dividing by an interest rate that takes into account the time value of money. By that methodology, an increase in interest rates would lower the value of equities. Also, higher interest rates often negatively affect corporate profitability by making credit conditions tighter. So what is going on?

For an explanation, we turned to Alec Young, managing director of our global markets research team, who points out that what drives interest rates higher matters a great deal:

“The reason equities have been positively correlated to rising interest rates recently is because higher rates represent a validation of global growth and are therefore consistent with healthy corporate fundamentals and thus good for stock prices," he says. "When inflation is driving interest rates higher it can be more of an equity negative, but lately the interest rate increase has been more about strong US growth and shared international expansion.”

Rate rises that are driven by economic growth are also a signal for positive corporate earnings to come. The level of interest rates can matter, as well. Research has shown that when the 10-year Treasury is below roughly 5%, the correlation with equities is positive, while when the 10-year Treasury is above 5% there is a negative correlation.[1]  Historically, when the 10-year Treasury yield has been much above 5% it has been driven by high inflation expectations and at times an overheated economy, both negatives for equities.

In the end this may be a good illustration of the principle that correlation does not prove causation. The positive correlation between interest rates and equities that we have seen this year may not represent one having a direct impact on the other. Rather, they have both been driven by a third factor: optimism about global growth.



[1] “Guide to the Markets, US 1Q 2017,” JP Morgan Asset Management, December 31, 2016, p. 17.


© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE GDCM”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE GDCM, MTS Next Limited, Mergent, FTSE FI and YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “WorldBIG®”, “USBIG®”, “EuroBIG®”, “AusBIG®”, “The Yield Book®”,  and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE GDCM, Mergent,  FTSE FI or YB. “TMX®” is a registered trademark of TSX Inc. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell Products or the fitness or suitability of the FTSE Russell Products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell Products is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this communication or links to this communication or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this communication or accessible through FTSE Russell Products, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE GDCM, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.

Blog Listing Page