Why stock prices react to changes in bond yields

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Bond yields have a direct impact on equity markets through valuation and capital allocation channels.

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Higher bond yields increase the discount rates used to value future corporate earnings, putting downward pressure on stock prices, particularly for growth-oriented companies. Lower yields reduce discount rates, supporting higher equity valuations.

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Rising yields can also make bonds more attractive relative to stocks, leading investors to reallocate capital away from equities. Conversely, falling yields often encourage risk-taking and support equity markets.

This relationship explains why stock markets frequently react strongly to movements in government bond yields.