Highlights:

• According to historical analysis, levels at which yields hurt the relative performance of equities versus bonds are distant from current ones. Mind the 2% threshold for the US 10-year T-bond yield.
• This cycle may be different. The long downward trend of real rates has made equities more dependent on low rates. Even a small increase in yields could hurt valuations, e.g. PEs. But strong earnings growth is offering some cushion.
• The 12m yield/equity correlation turned negative (till -0.6), i.e. equities are more exposed to a yield increase. Even if it has moved to zero lately, it could remain in negative territory for longer.
• We also looked at the effects of higher bond volatility and sharp yield changes. Historically, they have not been a cause per se of a negative performance of equities versus bonds.
• Lessons from the past in the relative play equity versus credit have to be taken carefully, as the public focus on economic preservation has made the tail risk on credit much thinner than before Covid.

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