Why bond yields move share prices

You can invest in shares for decades without ever buying a bond. You cannot invest for a week without bond yields affecting your portfolio. Here's the machinery.

The ruler

A share is a claim on a company's future cash flows. To decide what those future dollars are worth today, investors discount them — and the discount rate starts from the yield on long-term government bonds, the closest thing markets have to a risk-free return, plus an extra margin for taking equity risk. That government yield, usually the 10-year, is the ruler against which everything else is measured.

When yields rise, future dollars are worth less today, and every valuation built on them shrinks — mechanically, before anything changes at any actual company. When yields fall, the same arithmetic runs in reverse. Rates act on valuations the way gravity acts on everything else: invisibly, constantly, and without exceptions.

Why growth stocks feel it most

The discounting hits distant cash flows hardest. A mature company paying steady dividends has most of its value in the near future; a fast-growing company priced on profits it won't earn for a decade has its value parked far out on the timeline. Markets borrow a bond word for this — duration — and call growth stocks "long-duration equities." When yields jump, those far-off profits are discounted more brutally, which is why speculative and high-growth names swing hardest on yield moves while boring dividend payers merely wobble.

There's a second channel: competition. When bonds pay very little, the case for holding dividend-paying shares instead is easy. When bonds pay a respectable yield with no earnings risk attached, the hurdle for owning equities rises. Income-style sectors — utilities, infrastructure, listed property — compete most directly with bonds and often trade like distant cousins of them.

Read the reason, not just the number

One refinement separates a careful reader from a headline reader: why yields are moving matters as much as the move. Yields rising because growth is strong is a very different world from yields rising because inflation is running loose — the first comes with better earnings attached, the second usually doesn't. And the yield that does the real work is the real yield, after expected inflation, not the printed number.

Banks, incidentally, are a partial exception to the gloom — their lending margins can benefit when rates rise, which is one reason banks and tech so often move in opposite directions on the same data print.

You don't need to trade bonds to care about them. Every share price you'll ever look at quietly assumes a bond yield. It pays to know which one.

General information only — not personal financial advice.