When yields are this high, why buy stocks?

The US Treasury building in Washington, DC, US, on Tuesday, Aug. 15, 2023.

Nathan Howard | Bloomberg | Getty Images

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What you need to know today

Markets lost momentum
U.S. stocks pulled back Tuesday after a winning Monday, though the Nasdaq Composite still managed to eke out a small gain. Europe’s Stoxx 600 index added 0.68%. It was lifted by an 8.51% rise in French game publisher Ubisoft Entertainment after Microsoft said it would divest several gaming rights to the company as part of a new deal for its acquisition of Activision Blizzard.

Coinbase takes stake in Circle
Cryptocurrency exchange Coinbase is taking a stake in Circle, the company that issues and manages stablecoin USDC. A stablecoin is a cryptocurrency pegged to a traditional currency like the U.S. dollar; in other words, one USDC is equivalent to $1. The two companies also said they’d be closing down the Centre Consortium, a private governance organization for USDC. Here’s what the pros think Coinbase’s move could mean.

Baidu booms on marketing revenue
Baidu’s U.S.-traded shares rose 2.75% after the Chinese technology company reported earnings that beat expectations. Revenue in the June quarter rose 15% year over year to 34.1 billion yuan ($4.7 billion), around 1 billion yuan more than the estimate. It was bolstered by a 15% increase in online marketing revenue and 12% in the non-online marketing segment.

Thailand’s next prime minister
The Pheu Thai Party’s Srettha Thavisin will be Thailand’s next prime minister after the real estate mogul secured 482 votes from the nation’s bicameral National Assembly. Controversially, Pheu Thai formed a coalition with pro-military parties, leaving out the Move Forward party. Move Forward came first in Thailand’s election, but its leader, Pita Limjaroenrat, failed to win a majority of votes from the assembly.

[PRO] Now’s the time to buy duration
The U.S. 10-year Treasury yield’s at the highest level since 2007. While that means lower bond prices — since prices drop as yields rise — Charles Schwab thinks now’s a good time for traders to add to their fixed income portfolio.

The bottom line

At 4.332%, the 10-year Treasury yield’s at its highest in 16 years. That represents a risk-free, long-duration asset with relatively high returns, weighing on the stock market. The logic is: Why should traders invest in stocks that may not return as much, or just slightly more, when there’s an asset class that guarantees a 4% return?

As Rupert Thompson, chief economist at Kingswood Group, told CNBC, “Cash is now yielding 5% in the States, short-dated bonds are yielding 5% plus, so equities for the first time in a long time have actually got some real competition.”

Typically, stocks — if they do well — tend to return more than a risk-free asset, precisely because it isn’t certain stocks will rise. That’s called the equity risk premium, a return that’s supposed to compensate stock investors for the chance that they might lose money. But, as CNBC Pro’s Bob Pisani notes, the premium is below 1% now. Historically, it’s been between 2% and 4%. In other words, stocks are looking much less attractive than Treasurys.

Another potential issue that could crop up with high Treasury yields is that it could make the Federal Reserve’s job tougher. Apollo’s chief economist Torsten Slok warned that “long rates moving up is indeed a bit more challenging, in terms of getting the economy to that soft landing.” While “the Fed can control short rates,” long rates going up can introduce “significant risk” to the economy, such as the recent Fitch downgrade and quantitative tightening.

It wasn’t a surprise, then, that stock markets fell Tuesday. The S&P 500 slid 0.3% and the Dow Jones Industrial Average lost 0.5%. But the Nasdaq Composite edged up 0.06% to avoid two consecutive days of losses — despite Nvidia retreating 2.9% on the eve of its earnings report.

But don’t panic. “We’re in the pullback phase of a bull market,” said Adam Turnquist, chief technical strategist at LPL Financial. That is, it’s still too early to be bearish on stocks. Indeed, Yardeni Research president Ed Yardeni told CNBC he thinks “the market’s going to hang in there” — and “a year-end rally will bring the S&P 500 back to something like 4,600.” That implied increase of almost 5% in stocks — while not certain — would, however, certainly give Treasurys a run for their money again.

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