Rising Treasury yields will boost the US Dollar and trigger a double-digit stock market correction

• The US benchmark Treasury yields peaked at 3.259%, the highest level since April 2011.
• Rising US Treasury yields are expected to support the US Dollar, while the extent of stock market correction can play an important role.

If you are the stock market investor or an FX trader, current trend with the US benchmark Treasury yields rising to a fresh seven-and-a-half-year high should ring the alarm bell to your investment. The US Treasuries rose to 3.259% on Tuesday and further rise has pretty clear implications for the stock market and for the US Dollar.

While rising benchmark Treasury yields mean falling Treasury prices and relatively higher return for the bondholder, the stock market is set to suffer. Stock are generally more volatile, but their attractiveness compared to a safe bet on bonds is lower. Moreover, there is an empirically proven sensitivity line between the level of the US benchmark Treasury yield and the stock market.

Rising yields steal attractiveness off stocks

Back in November last year, the analysts from Societe Generale claimed that with the US benchmark Treasury yields at 3.00%, the US stock market could experience a double-digit correction lower. Now, the US benchmark Treasuries yield 3.259% and the US S&P 500 index is 13.35% higher than a year ago and the blue-chip Dow Jones Industrial Average is up 16.37% over the year. 

The US stock market sensitivity to rising benchmark 10-year Treasury yields

Source: Marketwatch, Societe Generale

Still, with rising US 10-year Treasury yields, the life gets harder in the US and elsewhere. Loans for financing cars, even mortgages are closely related to the US benchmark Treasury yields. Once the benchmark Treasury yields rise, all types of loans will become more expensive and less affordable for everyone. Not only for the US citizens and corporations but for all the international community that is using the US Dollar financing. 

Higher interest rates could start to eat into corporate profits and also signal that more inflation is coming and that is the reason why the US stock market analysts forecast a serious, double-digit correction in the US stock market.

Rising yields make US Dollar more attractive

Rising US Treasury yields support the US Dollar as investors worldwide are likely to seek the benefits of a stable economy with rising bond yields, especially with high liquidity. The relationship between the rising US Treasury yields and the US Dollar is though less straightforward.

With investors worldwide seeking the US Dollar investment in the bullish stock market, the willingness to keep the US Dollars in a bear stock market is lower, unless investors swing between stocks and bonds. The critical mass of money though is the institutional investors with a clear strategy that is unlikely to keep the US Dollar investment while selling stock in exchange for bonds. 

While rising US Treasury yields fundamentally supports the US Dollar, the yield differential needs to widen further in favor of the US yields to attract more and more money flowing into the US Dollars.

The US Dollar index is currently trading near 96.00 level, the highest level since this August. The real strength of the US Dollar though comes when the US Dollar index breaches 103.82 cyclical high from January last year and starts to climb towards 120.00 level, 2001 high.