Investor fears over the impact of 10-year US Treasury yields moving through the 'psychologically important' 3 per cent level may have been overdone, according to JP Morgan Asset Management’s Karen Ward.
With a greater reliance on long-term financing, the move towards 3 per cent in recent days could increase costs for both US corporates and mortgage borrowers.
Rising Treasury yields could signal faster rate-hikes by the Federal Reserve which has already raised the Federal Funds rate once this year.
Fed Funds rate dot plot
Source: Federal Reserve
However, Ward, chief market strategist at JPMorgan Asset Management, said that there were several reasons why investors shouldn’t be too concerned by more hikes in the rates. 
“Obviously with the US 10-year yield now going through 3 per cent, it is no longer the case that the Fed is easing off the accelerator, but are they actually now starting to touch the brake?”
Ward said that the reason the Fed is continuing on its rate-hiking cycle is that the US economy is performing strongly and looks set to gather momentum.
The strategist said there has been a 20 per cent rise in earnings growth in the US, thanks in equal parts to US president Donald Trump’s tax reforms, the strength of the domestic economy and international trade.
“Yes, the discount rate is rising but earnings expectations are rising by a considerable degree more,” she explained.
“The market is not liking the idea of tighter policy but I personally think when an economy is growing strongly and companies have pricing power, this is a market that is much healthier and where I would want to own equities.”
As such, Ward said concerns in markets over rising rates have been overdone, particularly given the strong earnings backdrop.
From a markets perspective, she said a rising rate environment should be more positive for financial stocks, but added there are “too many moving parts” to the economy to forecast with confidence. She also said all sectors have been driven by concerns over rising rates.
One area that remains of interest to Ward is technology, which she said has more to offer than the high-profile social media and e-commerce names that have driven the sector, and the market, more recently.
The technology-biased Nasdaq index has risen by 43.58 per cent over three years compared with the broader S&P 500, which includes financial stocks, as the below chart shows.
Performance of indices over 3yrs
Source: FE Analytics
“The underlying foundation for the technology story is much broader,” she said. “The trend towards automation and robotics and the decline in working population is very much still in place.
“If you think about business investment through this recovery it has been pretty subdued,” she added. “It’s been very late to get going and one of the reasons for that has been the fact that workers have been accepting real pay cuts every year.”
However, with little spare capacity in the labour markets in places such as the US and UK, wages are now starting to grow and, in such an environment, businesses will start to increase investment in technology to expand.
Turning to the UK, Ward said that a transition agreement between the EU and UK over Brexit was likely to bode well for both markets, although some further insight into the actual details was needed.
“I’m pretty optimistic here, I do think it’s in both sides’ interests to have an agreement which covers both goods and services,” she explained. “It’s clearly in the EU’s interest to have agreement in goods, but we export a lot of services, particularly financial services.
“Perhaps their thinking has evolved to expect losing a large financial centre with all the risks that sometimes entails. Clearly as 2008 demonstrated, leaving [the risks] on someone else’s balance sheet isn’t a bad idea.”
If a positive deal for both sides can be struck, the JP Morgan strategist said sterling should rise and the economy could begin strengthening after anaemic growth since the referendum in 2016.
Greater certainty over Brexit would also prove a fillip for businesses, which would be more likely to increase investment and make longer-term plans.
There could also be some upside for inflation from a positive Brexit process, which has risen as the cost of imported goods has increased following the fall in sterling.
As the below chart shows, sterling is down by 6.76 per cent since the EU referendum in June 2016.
Performance of sterling vs euro since EU referendum
Source: FE Analytics
“If sterling not only holds on to gains but appreciates further, we could see inflation falling pretty sharply, which would really help the UK consumer and we could be looking at the Bank of England normalising policy more swiftly,” she said, pointing out that inflation is more likely to move towards the Bank of England’s 2 per cent target by the end of the year if oil prices begin to stabilise.
One of the other areas of concern for investors has been Europe, where growth has slowed following a stand-out 2017 in which it outperformed the US. However, Ward said the eurozone economy is likely to have been affected by temporary issues, such as the sharp rise in the euro, which would have affected exporters’ confidence.
“Coupled with all the ongoing discussions with trade wars and the downturn in global trade, European companies are more leveraged into the trade cycle,” she said. “I do think some of the downturn in sentiment in Europe is probably temporary and we will see that turn back up.”