Credit Suisse is warning all investors of a looming "Bondcano" with the bond market erupting with an expected surge in bond issuances as buyers beat a hasty retreat.
This has the potential to drive global interest rates higher than they normally would go even as central banks around the world embark on a monetary tightening campaign by lifting interest rates.
The US Federal Reserve is looking to trim the size of its balance sheet by selling bonds that it had purchased as part of its Quantitative Easing programs, while the European Central Bank (ECB) is halving its bond buying exercise as the region's economy gathers steam.
This will add to supply of bonds in the market as the US government steps up to issue more bonds to pay for President Trump's promised tax cuts. This flood of supply comes at a time when demand for sovereign bonds is declining due to the prospect of interest rate hikes.
Interest rates and bond prices move in opposite directions, and a sell-off in bonds will drive up the cost of debt and impact on equity prices around the world.
But higher bond yields have historically been good for equities, according to Credit Suisse. The broker notes that the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and the S&P 500 index are positively correlated to the 10 year US government bond yield when the yield moves by more than 10 basis points in a week.
Don't get too excited. A bigger move, especially when yields are at a higher level, could actually be bad for stocks as Credit Suisse thinks this could become a material headwind because it would indicate tight liquidity conditions.
Also, not all stocks benefit from rising rates.
"Periods of rising bond yields have been a drag on stocks that have high Pes [price-earnings], high payout ratios and weaker growth prospects, or are gold producers," said the broker.
"These stocks are at the top of the Bondcano and investors should tread cautiously."
The stocks Credit Suisse thinks are most at risk of melting down with the Bondcano include gold producer Northern Star Resources Ltd (ASX: NST), infrastructure play Sydney Airport Holdings Pty Ltd (ASX: SYD), industrial property company BWP Trust (ASX: BWP) and hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC).
On the flipside, the broker notes that the following stocks are the strongest outperformers when bond yields rise. These include steel producer BlueScope Steel Limited (ASX: BSL), mining giant BHP Billiton Limited (ASX: BHP), share registry services group Computershare Limited (ASX: CPU) and investment bank Macquarie Group Ltd (ASX: MQG).
There is another group of stocks that are likely to march to the beat of their own drums too. What's more, the experts at the Motley Fool are particularly bullish on the outlook for this group.
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