Welcome to Thoughts in the Market.

I'm Andrew Sheetz, Chief Cross-Asset Stragist for Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends

across the global investment landscape and how we put those ideas together.

It's Friday, March 5th at 2pm in London.

Interest rates are moving higher, and a question that keeps coming up is at what level will

this be a problem for markets?

One could obviously say now, as this week saw a big rise in yields in some major market

volatility, but I think this question is more complicated, about shades of gray rather

than black and white.

In lots of articles and conversations, the idea that higher interest rates lead to weaker

markets is presented as something that's relatively obvious, but it's not.

For most of the last 30 years, global stock and credit markets have done better when

yields are rising and worse when they're falling.

To understand why, let's think about how assets are often valued.

When you value something that produces income over time, say earnings or dividends or

rents and so forth, two variables are usually paramount.

One is the discount rate, the hurdle rate that people demand for accepting the risk of

this investment relative to doing something else.

As bond yields rise, this discount rate can rise too.

If I can earn a higher return in a safe government bond, other things need to offer higher returns

and probably lower prices in order to compete.

...