If interest rates on treasury bonds rose, would this affect the price of common stock?

Question

How and why?

Answer 1

in generalized terms, higher interest rates put a damper on stock prices.

1. Prices are set by supply and demand. High interest rates make bonds comparatively more attractive than stocks to investors. Increased demand for bonds reduces demand for stocks and depresses stock prices.

2. Higher treasury rates mean higher business borrowing rates [higher costs], and lower profit margins. Investors anticipate that this will reduce future business profits and factor this into what they are prepared to pay for stocks.

3. Higher rates if maintained slow down economic activiity as business finds it harder to borrow and build. Anticipating a slower economy investors depress stock prices.

this generalization must be tempered with other factors that investors consider in buying stocks. Certain companies or industries may be structured to fare better in a higher interest rate environment and gain accordingly.[ debt free cash producing, gold mining ?]

Investors may consider the interest boost to be temporary and a buying opportunity. Higher interest rates may be the result of Federal Reserve action to dampen an overheated economy. Investors may see this as good in the longer term for stocks.

Stock prices involve vast amounts of analysis, second guessing and buyer [mob] psychology, that is difficult if not impossible to predict or even define.

It is still a fair generalization that high interest rates dampen stock prices.

Answer 2

Interest rates on treasury securities are often used as the risk free rate in stock valuation. When rates on treasury securities go up this reduces the valuation of common stocks. As rates (the yield) on treasury securities increases investors tend toward treasuries for safety and less risk of stocks.