MARKET INSIGHTS

Divergent Interests:
Interest Rate Sensitivity in the
Cross-Section of Stock Returns
June 2022

Introduction
Over the past decade, after years of remaining
relatively tightly clustered, the sensitivities of stocks
to movements in interest rates have become moredispersed at the individual stock, sector, and style factor
levels. In other words, there isn’t just a single “stockbond correlation.” As a result, equity portfolios could,
depending on their composition, perform in unanticipatedways relative to historical portfolios for which stock-bondcorrelations were mostly uniform. In particular, investors
in sector and style factor portfolios, as well as in many
commercial equity benchmarks, may now be exposed tomeaningfully more active interest rate risk than, say, ten
years ago.
In this paper, we present analyses showing the stark
increase in dispersion in the sensitivities of U.S. stocks to
the 10-year U.S. Treasury note since 2012; we thenconsider how the expansion of the U.S. Federal Reserve’s
balance sheet and its impact on Treasury yields may havebeen a driver of this phenomenon.
This shift has clear implications for investors, as we believethat taking into account the cross-sectional heterogeneity
in rate sensitivities can help improve risk management,
portfolio design, performance assessments, and asset
allocation decisions.

Interest Rate Sensitivity in U.S.
Stocks: A Tale of Two Decades
We first examine the sensitivity of U.S. stock returns tomovements in U.S. government bonds over the past two
decades. (We show broadly similar results for certain
non-U.S. markets in the Appendix.)
The key variable in our analysis is “Treasury beta,” which
we define as a stock’s idiosyncratic sensitivity to the 10year U.S. Treasury note. We compute Treasury beta using
a multivariate regression of daily stock (or stock portfolio)
returns on 10-year Treasury returns and the overall equity
market. 1 Treasury beta therefore represents a stock’s
excess sensitivity to movements in the 10-year Treasury
note while accounting for its equity market beta.
To track interest rate sensitivities through time, we sorted
U.S. stocks into deciles by Treasury beta and combined
them into groups of two deciles except for the top andbottom deciles. Figure 1 graphs the average Treasury
beta exhibited by stocks within each grouping over the
2001–2021 period. 2 The regression coefficients arrayedon the vertical axis can be interpreted as the averageincremental stock return within each grouping associatedwith changes in Treasury prices, having adjusted foroverall equity market beta. 3 For example, a Treasury beta

Figure 1: Treasury Betas of Stocks in the MSCI USA Index by Decile Grouping(2001–2021)
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0

Top Decile
Deciles 8–9
Deciles 6–7
Deciles 4–5
Deciles 2–3
Bottom Decile

Sources: Bloomberg; MSCI; Reuters Group; the D. E. Shaw group. Applicable data are used with permission of Bloomberg.
1
We follow the approach outlined in Malcolm Baker and Jeffrey Wurgler, “Comovement and Predictability Relationships between Bonds and the
Cross-section of Stocks,” The Review of Asset Pricing Studies, Vol. 2, No.1 (June 2012): 57–87.
2
Unless otherwise noted, the data reflected in the figures in this document were computed using rolling 252-day stock and bond returns over theapplicable period.
3

As a robustness check, we separately computed all Treasury beta figures presented in this paper while holding the volatility of regression
variables constant and found that our conclusions were broadly unchanged.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns1

of 0.50 suggests that a positive 1% return on 10-year
Treasuries is associated with a stock return of 0.5%
in excess of the return due to that stock’s equity
market beta.
We see that interest rate sensitivities exhibit increased
dispersion, particularly at the top and bottom of the
distribution, starting around 2012. Indeed, the interest
rate sensitivities of stocks in the top and bottom deciles
more than doubled relative to their pre-2012 levels formuch of the last decade.
Figure 2 plots the increase in R-squared, a measure of
explanatory power over variations in outcome, resulting
from the inclusion of 10-year Treasury returns as asecond independent variable in a regression of eachdecile portfolio’s average return on the equity market
return. In other words, this graph depicts the amount ofdecile return variation that can be explained over andabove the impact of equity market beta alone by adding
bond returns to the analysis.
Prior to 2012, for the top- and bottom-decile portfolios,
the explanatory power gained from including Treasury
returns in the analysis averaged 3.4% and 2.7%,
respectively. Over the subsequent decade, those
figures increased three- to four-fold, to 13.5% and8.2%, respectively.

Figure 2: Incremental Explanatory Power of 10-Year U.S. Treasury Returns on the
Returns of Stocks in the MSCI USA Index by Treasury Beta Decile Grouping(2001–2021)
40%

Top Decile
Deciles 8–935%

Deciles 6–7
Deciles 4–5

30%

Deciles 2–3
Bottom Decile

25%

20%

15%

10%

5%

0%

Sources: Bloomberg; MSCI; Reuters Group; the D. E. Shaw group. Applicable data are used with permission of Bloomberg.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

2

Similar to what we observe with respect to single stocks,
we also see increased dispersion in interest ratesensitivities when our focus moves to equity sectors andstyle factors, as shown in Figures 3 and 4, respectively.
Each graph depicts the impact of Treasury returns on
sector or style factor returns after accounting for equity
market beta.

Treasury beta dispersion across sectors and style factors
was muted until about 2012 but grew substantially inthe decade that followed. Although there is some time
variation, the financial and energy sectors generally
exhibited negative Treasury betas (underperforming
when interest rates fell), while utilities and real estate
exhibited mostly positive Treasury betas. Most recently,

Figure 3: Treasury Betas of Sectors in the MSCI USA Index(2001–2021)
Basic Material

2.0

Consumer Cyclical

1.0

Consumer Non-Cyclical

0.0

EnergyFinancial-1.0

Health Care

-2.0

Industrial
Real Estate-3.0

Technology and Telecom-4.0

Utility

Sources: Bloomberg; MSCI; Reuters Group; the D. E. Shaw group. Applicable data are used with permission of Bloomberg.

Figure 4: Treasury Betas of Select Style Factors in U.S. Equities(2001–2021)
5.0

Size

4.0

Value

3.0

Quality

2.0

Momentum1.0

Low Beta

0.0
-1.0
-2.0
-3.0
-4.0

Note: Other than data reflected for the “Low Beta” style factor, all data reflected in this figure were computed using returns of the
Fama/French style factors, which are for stocks in the Fama/French Total US Market Index. The "Quality” style factor is termed “profitability”
in the Fama/French framework. The data reflected for the Low Beta style factor were computed by the D. E. Shaw group using the returns ofstocks in the MSCI USA Index.
Sources: Bloomberg; Kenneth R. French; MSCI; Reuters Group; the D. E. Shaw group. Applicable data are used with permission of Bloomberg.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

3from the onset of the COVID-19 pandemic, technology
stocks—often viewed as long-duration assets withexpected cashflows far in the future—experienced thehighest Treasury betas among sectors.
Among style factors, returns to the value factor had
negative excess sensitivities to Treasury returns over the
past decade after exhibiting only minimal suchsensitivities in the decade prior. This suggests thatinvestors may wish to consider, as a matter of risk
management, the relationship between factor returns
and interest rate movements when explicitly investing infactor-tilt portfolios or in strategies that may haveunintentional factor or style biases.

market returns, investors rarely seek exposure to sectors
or style factors in their pure form (e.g., throughportfolios comprising 100% long/short exposure tovalue or 100% financial stocks). This raises thefollowing question: How have “investable” portfolios
been affected by this increased dispersion?
To address that question, we computed Treasury betas forselect investable indices, using the broad universe of U.S.
stocks constituting the Fama/French Total US Market
Index to compute equity market beta. Figure 5 presents
Treasury betas for two periods 20 years apart.

Measuring the Impact on
Performance

Consistent with our other findings, Treasury betas forthese investable indices experienced a large increase indispersion between the two periods. The approximate
spread in Treasury betas among these indices jumped
from 0.20 (-0.15 to 0.05) to more than 1.35 (-0.65
to 0.70).

While increased dispersion in interest rate sensitivities
across sectors and styles highlights the importance ofstock-bond correlation in the cross-section of U.S. stock

The magnitude of these differences is economicallymeaningful. A Treasury beta of 0.70, for example,
suggests that if the 10-year Treasury note returns -5%

Figure 5: Treasury Betas of Select Indices(Calendar Years 2001 and 2021)

0.75

0.50

2001

2021
Nasdaq-100 Index®
Russell 1000® Growth Index
Nasdaq Composite®

0.25

MSCI USA Quality Index
MSCI USA Momentum Index

0.00

MSCI USA Sector Neutral Quality Index
S&P 500®

-0.25

S&P 500® Dividend Aristocrats Index
Dow Jones Industrial Average-0.50

Russell 1000® Value Index
Russell 2000® Index-0.75
Note: The data reflected in this figure were computed using the daily returns of (1) each index shown, (2) the stocks in the Fama/French Total
US Market Index, and (3) U.S. 10-year Treasuries.
Sources: Bloomberg; Kenneth R. French; London Stock Exchange Group; MSCI; Russell; the D. E. Shaw group. Applicable data are used withpermission of Bloomberg.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

4because of interest rate changes (a slightly less than one
standard deviation move on an annualized basis over the
2001–2021 period), the relevant index would
underperform its equity market beta by 3.5%.

The excess return of the technology sector is pared down
considerably after adjusting for its equity market beta,
and further still when adjusting for Treasury beta.
Although technology was the top-performing sector overthe period on an unadjusted basis, it falls to third after
accounting for those betas. The utility sector return, bycontrast, receives a substantial boost when adjusting forequity beta, but more than half of that gain dissipates
after adjusting for Treasury beta.

At a more granular level, this trend also has implications
for performance attribution. Investors often equity betaadjust sector returns when considering sector-specificinvestments. Given the increased dispersion in interest
rate sensitivities, it is instructive to consider how sector
returns are affected when adjusting for equity andTreasury betas over the past dozen years. The
performance presented for the technology and utilities
sectors in Table 1 stands out in that respect.

Table 1: Excess Returns, Equity Beta, and Treasury Beta for Sectors in the MSCI USA Index(2010–2021)
AverageAnnualized
ExcessReturnAdjusting for
Equity Beta

Adjusting for
Equity andTreasury Betas

Basic Material-3.06%-4.95%

Consumer Cyclical

2.72%

3.26%

SectorEquity Beta

Treasury Beta

-4.12%

1.10

-0.18

3.14%

0.97

0.03

Consumer Non-Cyclical-3.77%

1.60%

0.53%

0.68

0.23

Energy-9.32%-12.30%-10.81%

1.16

-0.32

Financial-0.98%-4.35%-0.88%

1.14

-0.74

Health Care

0.23%

2.79%

2.57%

0.84

0.05

Industrial

0.64%-0.08%

0.69%

1.03

-0.16

Real Estate-1.69%-0.55%-4.15%

1.01

0.77

Technology and Telecom

3.85%

3.03%

2.21%

1.07

0.17

Utility-4.78%-0.04%-2.85%

0.76

0.60

Note: The data presented in this table were computed using daily stock and bond returns.
Sources: Bloomberg; MSCI; Reuters Group; the D. E. Shaw group. Applicable data are used with permission of Bloomberg.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

5

A Closer Look at Rate
Sensitivities Dispersion
What accounts for this increased dispersion in the interest
rate sensitivities of U.S. stocks? We considered a numberof explanations and, although none struck us asincontrovertible or all-encompassing, we offer here aconjecture related to the interest rate environment that we
believe is intuitively appealing. The beginning of thegrowth in dispersion coincided with the U.S. Federal
Reserve’s efforts to expand its balance sheet and manage
yield curves beyond the traditionally targeted short end of
the curve. The Fed’s initiatives helped drive interest rates
lower, and central banks in Japan and Europe pursued
similar policies. 4 Figure 6 overlays the Fed’s growing
balance sheet on the cross-sectional dispersion in Treasury
betas, measured as the standard deviation of Treasury
betas across stocks each day.
Central bank policy may have incentivized investors to
begin assessing equities through a lens of “bondlikeness” and to more closely scrutinize what they mayview as “bond-equivalent” equities. The extent to which

a stock’s characteristics resemble those of government
bonds might matter more for equity pricing than it
did in the past, increasing the importance of interest
rate sensitivities in the analysis of stock returns.
If monetary policy contributed to this trend of diverging
interest rate sensitivities across equities, should we
expect sensitivities to reconverge if and when monetary
policy normalizes? In our view, the answer may be “no.”Once awoken to interest rate sensitivity, investors may
continue to consider it a key factor in equity pricing, inmuch the same way that the size-value style box became
entrenched in stock analysis during the 1990s.
Finally, it is important to keep in mind that monetary
policy is only one among several factors that may havecontributed to the dispersion in interest rate sensitivities
over the past decade. Other potential drivers include
industry-specific developments, such as changes infunding conditions for financial companies; a period of
relatively low equity market volatility; dispersion in
relative valuations across equities; and changes in thecapital structure and payout behavior of companies.

Figure 6: U.S. Federal Reserve Total Assets and Cross-Sectional Dispersionof Treasury Beta for Stocks in the MSCI USA Index(2001–2021)
12.0

2.4
2.2

10.0

2.0
1.8

8.0

1.6
1.4

6.0

1.2
1.0

4.0

0.8
0.6

2.0

0.4
0.2

0.0

0.0

Cross-Sectional Dispersion of Treasury Beta (LHS)

Federal Reserve Total Assets (USD $trn) (RHS)

Sources: Bloomberg; Federal Reserve Bank of St. Louis; Federal Reserve Board of Governors; MSCI; Reuters Group; the D. E. Shawgroup. Applicable data are used with permission of Bloomberg.
4

We discuss those policies and associated market dynamics in Floor It: Market Pricing of the Lower Bound on Interest Rates, available here.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

6Conclusion
There isn’t just one uniform “stock-bond correlation”
across U.S. equities. Over the past decade, U.S. equities
exhibited increased variation in their sensitivities tointerest rate movements at each of the individual stock,
sector, and style factor levels. Consequently, we believethat sector and style factor portfolios, as well as many
commercial equity benchmarks, may have more active
exposure to interest rates than many investors appreciate.
Increased dispersion of interest rate sensitivities acrossequities highlights the importance of rigorous, dynamic
risk management in portfolio construction and robust
performance evaluation in investment decision making.
At the same time, it could provide opportunities forinvestors looking to actively manage the exposure of
their equities to Treasuries. With interest rate shifts
already underway from the U.S. Federal Reserve andother central banks, we believe that stock-bondsensitivities merit a closer look in the near term andyears ahead.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

7Appendix
Our findings indicate that increased dispersion in interest rate sensitivities over the past decade has not been limited
to U.S. stocks. As depicted in the following two figures, we observe similar trends in the Japanese and European
equity markets.

Figure 7: JGB Beta of Japanese Stocks by Decile Grouping(2001–2021)
8.0

Top Decile

6.0

Deciles 8–9
Deciles 6–7

4.0

Deciles 4–5

2.0

Deciles 2–3

0.0

Bottom Decile

-2.0
-4.0
-6.0
-8.0

Note: The equity returns used in the computation of the data reflected in this chart are for the Japanese stocks included in the MSCI PacificIndex. Bond returns are for 10-year Japanese government bonds.
Sources: Bloomberg; MSCI; Reuters Group; the D. E. Shaw group. Applicable data are used with permission of Bloomberg.

Figure 8: Bund Beta of Europe ex. U.K. Stocks by Decile Grouping(2001–2021)
3.0

Top Decile

2.0

Deciles 8–9

1.0
0.0
-1.0

Deciles 6–7
Deciles 4–5
Deciles 2–3
Bottom Decile

-2.0
-3.0
-4.0

Note: The equity returns used in the computation of the data reflected in this chart are for the stocks included in the MSCI Europe Index otherthan those listed in the United Kingdom. Bond returns are for 10-year German bunds.
Sources: Bloomberg; MSCI; Reuters Group; the D. E. Shaw group. Applicable data are used with permission of Bloomberg.

MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

8

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MARKET INSIGHTS | Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns

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