Las nuevas líneas rojas de la deuda para la Bolsa

The variable income market is holding near record levels despite debt levels exceeding 5% in US bond yields. Analysts are now incorporating a key structural change that allows for higher critical thresholds for the stock market. The current 5% US debt interest rate does not pose a critical threshold for the stock market in the current environment, according to JPMorgan analysts.

Evidence is that Wall Street recently surged to historical records with reference debt above 5%. Bonds, of course, amplify the pressure. Yesterday, not only did 10-year sovereign debt exceed 5%, but 5-year sovereign debt also surpassed it for the first time since 2007, and 30-year bonds reached a maximum since 2004 at 5.44%. Traditionally, 5% has been the debt signal threshold for market declines or at least a psychological barrier against optimism.

Historical data shows several precedents pointing to this line. Global variable income lost half its value the last time US 10-year bond interest exceeded 5%, just before the global financial crisis. The stock market crash was similar less than a decade earlier when a rise to nearly 6.8% contributed to the dotcom bubble burst. The current environment allows for a mitigation of these warnings.

Analysts at UBS say the market is not falling as much due to higher yields, but rather contracting under its pressure, as stated before with a caveat. In their view, bond yields are rising for positive reasons such as a broad investment surge in defense, artificial intelligence, infrastructure, and energy sectors. JPMorgan analysts make a similar point.

They highlight that one reason the 5% debt level has not yet triggered a stock market correction is a key structural change in the global economy. This novelty, explains JPMorgan, is that artificial intelligence, and to a lesser extent healthcare and services, are playing a much bigger role. They argue that many companies in these sectors are immersed in strong demand dynamics that are investing and expanding regardless of financing costs.

The demand strength allows, according to JPMorgan analysts, that the traditional interest rate channel seems considerably less restrictive. And in this context, the debt critical threshold for the stock market could be significantly higher. JPMorgan suggests that potentially it could sit in the range of 5.5% to 6.0%. Another determinant factor in the degree of impact of debt on the stock market is the persistence of high financing costs.

A short-term rise above 5% could have very limited effects. And vice versa. Invesco points to this point. It uses the historical series and translates that the global stock market begins to decline when US 10-year bond interest averages 4.72% for 12 months. Today, the US sovereign debt is still far from reaching this figure. Despite current levels, over the past 12 months the 10-year bond has averaged 4.34%.

This figure could be encouraging. But the trend is worrying. This is why Invesco warns that if US bond yields continue to rise, there is a risk that the stock market could fall to levels lower within 12 months. At this point, the uncertainty of whether 6% in debt could be the new 5% may be clarified.