Stocks drop as bond yields rise

European equities are sliding as the cost of borrowing for eurozone countries creeps higher.

European bond yields are back in the news for all the wrong reasons. Dealers are concerned the rising borrowing costs for indebted European counties will drag the eurozone debt crisis back into the limelight. Today saw the start of a two-day hearing, in which the European Central Bank (ECB) was brought before the Constitutional Court of Germany. The central bank is under scrutiny because it purchased European government bonds during the debt crisis to try and boost confidence in the region. The lack of bad news over the past three months has helped push some equity markets to multi-year highs, and traders were looking for a reason to take some money out of the market. This court hearing has provided an excuse.

In the US, the Dow is down 0.5% as the worries in Europe are weighing on investor confidence. Jim O’Neill of Goldman Sachs stated we could see the yield on the US ten-year bond increase from below 2% to 4%. This could prompt investors to re-assess their bond holdings, and potentially take their cash out of US government bonds to buy equities, which currently have a higher yield.

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