Rates went up last week after the Federal Reserve's Open Market Committee's October meeting notes were released hinting that maybe – just maybe – they would consider tapering it $85 billion monthly bond-buying operations at some point in the near future. The markets are now anticipating higher rates down the road.
"Longer-term, they're going over 3% for 2014," predicts John Stephenson, portfolio manager at First Asset Investment Management. "In the short run, they're coming down."
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While many in the market look at interest rate levels to determine what's next for the S&P 500 index, Steven Pytlar, Chief Equity Strategist at Prime Executions, says there's a bit more nuance to it.
"We have seen as it relates to the S&P and 10-Year yields, it's the rate of change that matters, and not necessarily the trend in yields," says Pytlar.
"Since October, we've seen a steady rise in yields and the S&P has moved higher along with it," says Pytlar. "So, higher yields aren't necessarily a reason to jump out of the market. Where higher yields are a major headwind and are very closely correlated to lower prices is in emerging markets."
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"There is a much closer [negative] correlation between US yields and the emerging markets than there really is between US yields and the S&P 500," says Pytlar.
So, now the big question: Since emerging markets stocks and US interest rates have a very negative relationship these days, can emerging markets stocks be used as a secret indicator for where bonds are going next?
To find out the answer to this question – and to see why there's a close relationship between US rates and emerging markets, watch the video above.
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