Stocks Face Uphill Climb on Rising Bond Yields

The 10-year US Treasury bond yield, which recently broke past the key 4% mark, kept rising last week and now rests at 4.16%, up from 2.87% a year ago.

Bond yields play a vital role in most stock price models. In the Capital Asset Pricing Model (CAPM), for example, they represent a "risk-free" credit option, setting the alternate cost for money put into stocks.

When these yields go up, the alternate cost of money tied up in stocks also rises, leading to a decrease in the predicted profits from stocks. As a result, stocks become less valuable.

Analysts believe this clarifies the recent drop in areas of the stock market where values have been growing lately, such as the Nasdaq. The tech-focused index has fallen by 300 points, or over 2%, in a week.

Jumps in bond yields aren't a new phenomenon on Wall Street. They occur now and then as the bond market reacts to the changing availability of capital.

Experts believe that three things make the recent jump in bond yields alarming. First, there has not been a rise of this level since 2006-7, just before the Great Recession and the resultant stock market crash.

Second, this comes right after Fitch downgraded U.S. debt last week, meaning U.S. debt isn't seen as the risk-free bet it once was. This raises the risks for all financial assets, making it tougher for investors to shield their money from market dangers.

Finally, the latest rise in bond yields took place despite positive consumer inflation data for July announced during the week.