Investing.com - Higher bond yields are the "main risk" to share prices in the US and will give support to the dollar in the near term, analysts at BCA Research have argued.
Longer-dated US Treasury yields have soared to multi-month highs, with the yield on the benchmark 10-year note hitting more than 4.7% on Wednesday -- a level not seen since April. Yields typically move inversely to prices.
The uptick sparked a wave of selling in major currencies against the greenback, with the euro dipping toward parity and sterling briefly shedding more than 1%.
Impacting sentiment was a CNN report that President-elect Donald Trump is mulling declaring a national economic emergency in order to provide the legal underpinning for sweeping import tariffs on both allies and adversaries. Earlier this week, Trump also denied a separate report that his team was considering scaling back the levies to cover only critical goods.
Investors, who initially welcomed the prospect of looser regulation and tax cuts during a second Trump term in the White House, have come to fret that the tariffs could reignite inflationary pressures, strain government coffers, and ultimately limit the space for Federal Reserve policymakers to roll out more interest rate cuts.
In a note to clients, the BCA Research analysts led by Arthur Budaghyan predicted that 10-year Treasuries are now "heading to 5%". They flagged that such a jump could push up the cost of corporate debt as well, which may cause mid- and small-cap stocks in particular to "suffer".
Meanwhile, recently frothy valuations have also made US equities "more vulnerable" to elevated Treasury yields, the analysts said. US equity risk premium -- the extra return investors can expect for holding stocks over government bonds -- is "very depressed," they added.
Stocks, which soared in the wake of Trump's victory in November, have begun to show signs of potentially faltering. The S&P 500 was broadly unchanged on Wednesday.
(Reuters contributed reporting.)