Goldman Sachs said in its note Tuesday that while the correlation between bond yields and equities is complex and unstable, higher yields do impact stocks.
The investment bank stated that today, as deflationary pressures erode, the correlation between bond yields and equities is likely to be more negative.
The firm provided five factors that impact the relationship between bond yields and equities. Firstly, they note that historically, UST 10-year yields around 5% or real yields above 2.5% have been 'bad' for equities.
"Equities tend to be more immune earlier in the cycle when interest rates are rising from low levels and growth is usually recovering from a trough," explained the bank.
Furthermore, they note that the slower the adjustment, the better equities can cope, while they also believe the valuation of equities matters, with lower equity valuations and higher equity risk premia making equities less vulnerable to any given rise in yields.
"The current high valuations of equities make them more vulnerable to rising bond yields from current levels," adds the bank. "The difference between real or nominal yields has an impact; inflation-led rises are often easier for equities to digest."