FTSE 100: Will Rising Bond Yields Impact the Index?

Rising UK bond yields are drawing investor attention, but Goldman Sachs analysts argue that the FTSE 100 remains relatively insulated, at least compared to more domestically exposed parts of the market.

“Long-term UK yields have increased roughly as much as US ones since the beginning of May (but still significantly less than Japanese yields), reaching levels not seen since the mid 90s,” wrote the bank.

The sharp move is said to come amid a backdrop of “a relatively weak fiscal position” in the UK, with analysts pointing out that “the UK deficit widened in April, despite a hike in employer tax.”

Despite this, the FTSE 100 has proven resilient. While it has “marginally underperformed MSCI World since the start of May,” Goldman sees several factors shielding the index. 

First, the FTSE 100’s composition of large-cap international companies “makes them less vulnerable should UK-specific fiscal concerns be a factor in pushing up Gilt yields,” according to the bank.

Second, the index’s status as a “value index having few longer-duration growth stocks” reduces sensitivity to rising rates. 

Lastly, Goldman says, “high yields reduce the present value of liabilities for DB pension funds, a likely benefit for the sponsor companies.” 

Still, risks remain for specific sectors. According to Goldman Sachs, “the most vulnerable segments of the market to rising long rates are domestically exposed stocks, real estate and homebuilders.”