Will Stocks Withstand the Surge in Treasury Yields? 3 Questions About the Debt Crisis
Rising corporate earnings and confidence in AI are keeping the stock market afloat for now
The uptrend in the stock markets continues, although Treasury yields have consistently exceeded the 5% threshold since July / Photo: X/NYSE
A sell-off in long-term U.S. Treasury bonds pushed their yields to nearly 20-year highs, but the MSCI All-Country World Index—which tracks the performance of large- and mid-cap stocks worldwide—remains near its all-time high. Analysts surveyed by Bloomberg warn that if Treasury yields spike sharply, the stock market will eventually react.
Why is the stock market holding up?
Back in May, participants in an informal Bloomberg survey claimed that yields on 30-year Treasuries above 5% would bring the rally to a halt. Since July, those yields have consistently exceeded that threshold. Although signs of strain have emerged in the market, stocks have generally continued to rise. Strong earnings reports provided one of the main sources of support: second-quarter earnings for S&P 500 companies rose by a third year-over-year. According to the agency, this is one of the best results on record.
Optimism that demand for AI will justify the capital expenditures of technology companies has helped the global stock market recover, according to Bloomberg. At the same time, the need to finance the AI boom is intensifying competition for capital and driving up borrowing costs, the agency notes.
Rising yields in the bond market point not only to “sticky” inflation and high volumes of debt issuance, but also to the resilience of the global economy, according to Bloomberg. During the current bond sell-off, yields have risen gradually, while the MOVE index—a measure of U.S. bond market volatility—has remained near five-year lows. But Georgios Leontaris, investment director for HSBC Global Private Banking in the EMEA region, warned in comments to Bloomberg: “If bond yields jump suddenly and chaotically, the stock market will eventually react.”
What sets the current sell-off apart from the one that took place in 2022?
The scale of the current sell-off in the bond market is smaller than it was four years ago. Over the past 20 days, global government bond yields have risen by 17 basis points, compared with 62 basis points over a comparable period in late 2022. The decline in global bonds from peak to trough in 2026 was 4.2%, compared with 23% in 2022, according to Bloomberg. At that time, central banks, led by the Fed, carried out the fastest and most coordinated tightening of monetary policy in half a century. Over the course of that year, the combined market capitalization of companies in the MSCI ACWI index fell by approximately $18 trillion.
Interest rates are now significantly higher than they were after the pandemic, and traders expect them to rise further. Fed Chair Kevin Warsh warned in August that inflation in the U.S. is not slowing noticeably and that the central bank may “still have work to do.”
What could derail the stock market's growth?
Rising yields on debt securities not only intensify competition between stocks and less risky government bonds, but also reduce the present value of projected corporate earnings factored into stock prices, explains Bloomberg. Technology companies are particularly sensitive to this, as their valuations depend more heavily on profits expected in the distant future.
The risk premium—calculated as the difference between the ratio of the S&P 500 companies’ aggregate earnings to their market capitalization and the yield on 10-year Treasuries—has remained negative since 2024. This means that, based on this calculation, Treasuries yield more, even though they are considered less risky.
However, Société Générale’s alternative model still favors stocks. They can withstand a further 50–60 basis point rise in Treasury yields, according to Manish Kabra, the bank’s chief strategist for the U.S. market. In his view, only a 200-point rise in yields would provide grounds for saying that the stock market rally has ended.
A sharp economic slowdown or recession is likely to make bonds more attractive, provided that inflation falls at the same time, according to Bloomberg. A sharp rise in debt market volatility will also cause investors to take a more cautious approach to stocks. Another factor in favor of bonds is that their real yields—that is, yields adjusted for inflation—are at multi-year highs, the agency notes.
This article was AI-translated and verified by a human editor
