- 2000: Volume 9, No. 1 S&P 500: When Bond Yields Rise

The past year or so, the 30 year bond's yield has risen, but the stock market has continued to rise. Since 1982-the beginning of the stock bull market, when the yield has increased a large amount, how often has the price of the S&P 500 Index moved in the same and opposite directions?

Definitions

Before we handed that question to the computer, we had to objectively define, "when the yield has increased a large amount."

Lows & Highs: We used the 10-day moving average of the bond yield to identify reactionary lows and highs. When the yield crosses above the 10-day average, the previous low yield is considered a reactionary low. Then when the yield crosses below the average, the previous high yield is considered a reactionary high. Successive lows and highs are labeled this way as the yield crosses above and below its average (see Figure 1).

Figure 1

Large Yield Increase: Between each successive low and high, is a yield increase. For the purposes of this study, we defined a large yield increase when the distance between the low and high was more than five percent of the starting yield level.

Approach & Test

We identified the times when the yield of the 30-year increased a large amount. Each time we recorded the associated price change of the S&P, and counted the number of times the S&P's change was in the same or opposite direction.

An Example

In late-Jan 1999 the yield dropped below its 10-day moving average. On January 29 it bottomed at 5.09. The yield began to rise and it crossed above its average. By February 12 the yield reached a high of 5.42. Soon after it dropped below its moving average. The January 29 to February 12 period, the yield rose 0.33 or 6.5 percent [(5.42 - 5.09) 5.09 = 6.5 percent]. The yield increased a large amount.

From January 29 to February 12 the S&P fell 49.5 pts, from 1279.6 to 1230.1. As expected it moved in the opposite direction of the yield change (see Figure 2).

Figure 2

Test Results

Since 1982-the beginning of the equity bull market, the yield of the 30-year bond increased a large amount 48 times. During 39 of the 48 large increases (81 percent of the periods), the associated S&P price change was in the opposite direction-stocks sold-off (see Figure 3).

Comments

Five of the last seven large yield increases, stocks have rallied. The equity market has been fighting the rising rate trend a bit longer than one year. Rising interest rates and stock prices are a fluke. Therefore, it is unlikely to continue.

Only one other period of time during the bull market did the S&P buck the rate trend. In May 1986, the yield increased a large amount, but stocks continued to rally. This occurred again a few times until August 1987. That month stocks peaked, so the equity market fought the rising rate trend a bit longer than one year. Months later the stock market crashed.

Figure 3

Begin Date	End Date	30 Yr. Yld. Change	S&P Price Change	Direction
12/10/99 09/30/99 05/25/99 04/29/99 02/17/99 01/29/99	12/23/99 10/26/99 06/11/99 05/11/99 03/04/99 02/12/99	5.2% 5.2% 6.6% 5.8% 7.1% 6.5%	+41.3 -0.8 +9.2 +12.8 +22.6 -49.5	Same Opp Same Same Same Opp
10/19/98 10/05/98	11/06/98 10/09/98	7.8% 8.7%	+78.6 -4.2	Same Opp
07/31/97 02/14/97	08/12/97 03/19/97	5.7% 6.9%	-27.8 -22.7	Opp Opp
11/29/96 08/09/96 04/02/96 03/04/96 02/13/96	12/18/96 090/5/96 04/10/96 03/15/96 02/28/96	5.4% 6.9% 5.3% 6.4% 7.3%	-25.5 -12.7 -21.8 -9.4 -15.8	Opp Opp Opp Opp Opp
07/12/95	07/21/95	6.4%	-7.3	Opp
08/31/94 06/06/94 04/26/94 03/22/94 02/02/94	10/06/94 07/11/94 05/09/94 04/04/94 03/10/94	6.8% 7.0% 7.4% 8.3% 11.0%	-23.1 -10.8 -9.5 -29.9 -18.1	Opp Opp Opp Opp Opp
10/15/93	11/05/93	7.4%	-9.9	Opp
01/08/92	02/03/92	5.8%	-8.6	Opp
08/01/90 04/04/90	08/24/90 04/26/90	9.6% 6.3%	-44.0 -8.2	Opp Opp
12/19/89 08/01/89	01/29/90 08/22/89	9.4% 5.2%	-17.3 -2.6	Opp Opp
04/08/88 03/03/88	05/11/88 04/04/88	6.0% 6.7%	-16.1 -11.8	Opp Opp
11/20/87 09/22/87 08/14/87 07/07/87 05/08/87 03/17/87	12/11/87 10/15/87 09/15/87 08/04/87 05/19/87 04/24/87	7.0% 7.3% 10.8% 7.7% 5.7% 15.9%	-6.7 -21.4 -16.3 +8.8 -13.8 -10.9	Opp Opp Opp Same Opp Opp
10/6/86 08/29/86 07/15/86 05/27/86 04/16/86	10/20/86 09/19/86 07/28/86 06/02/86 04/24/86	5.0% 8.7% 6.4% 7.1% 7.1%	+1.2 -20.7 +2.4 +0.3 -0.2	Same Opp Same Same Opp
02/14/85	03/06/85	6.3%	-1.8	Opp
04/12/84	05/30/84	12.5%	-7.4	Opp
07/19/83 06/16/83 05/04/83 01/12/83	08/08/83 07/12/83 060/8/83 02/08/83	7.7% 6.5% 6.9% 7.0%	-5.6 -3.6 -2.0 -1.0	Opp Opp Opp Opp
05/20/82 01/29/82	06/22/82 02/09/82	8.4% 6.1%	-6.3 -6.7	Opp Opp

Alex Saitta is a vice president and Yuxin Li is a research assistant in the New York office of Salomon Smith Barney. Alex can be reached at alex.saitta@ssmb.com