Trading Nation

Why rising European yields are a worry for stocks

Behind the European yield bounce
Behind the European yield bounce

Over the past three weeks, the yield on the 10-year German bund has more than tripled, albeit from incredibly low levels. And that's sending up warning signs for investors, particularly in U.S. equities.

"Low interest rates have supported global equity prices during a period of very slow macro growth," Convergex chief strategist Nicholas Colas wrote in a note Wednesday to clients. "To hold stock prices constant—or see them rise—during a period of rising rates, you need to see tangible signs of economic growth and rising corporate earnings."

Read MoreBonds are the scariest thing out there: Bessemer CIO

The basic issue is that low bond yields support rich stock valuations, as they reduce the attractiveness of alternatives to risk assets. But U.S. yields have risen alongside European ones lately, in a move than investors have long been anticipating. If rates continues to surge, stocks will need to show some serious earnings growth.

"U.S. stocks will have to sing for their supper," Colas wrote. "It can be a nice tune about lower interest rates, sung in the European language of your choice. Or, it can be a robust march with verses promising a vigorous domestic economy."

Others also have some concerns. Technical analyst Todd Gordon sees the recent yield move as giving the Federal Reserve license to hike rates—which could be an issue for stocks.

"Why are commodities rallying? Why are bonds selling off? Why is the dollar selling off? Everything from an intermarket point of view points to inflation. … So I wonder if the Fed's going to be move sooner rather than later," Gordon said. "I think that may be trouble for equities if we are in fact going to get a rate hike."

Forecasting inflation is a major departure from the market's recent milieu: The big modern concern has been disinflation or deflation, rather than inflation.

Read More

Want to be part of the Trading Nation? If you'd like to call into our live Monday show, email your name, number, and question to