Global bond yields are marching higher, yet equity investors appear to be turning a blind eye. Wall Street strategists largely agree that yields have not climbed high enough to derail the stock market's bull run, but they also concede there is a clear tipping point beyond which the situation could change dramatically.
According to Bank of America's latest global fund manager survey, institutional investors have allocated 56% of their portfolios to equities, the highest level since November 2021. Interestingly, the same survey flags "disorderly bond yield increases" as the second-biggest threat to the stock market, trailing only concerns over an AI bubble, while 25% of respondents cite a resurgence of inflation as the top risk.
On Wednesday, the U.S. Treasury unexpectedly announced an expansion of its long-dated bond buyback program, offering a brief reprieve to markets—the 10-year yield dipped 6 basis points to 4.65% and the 30-year yield fell 9 basis points to 5.19% that day. However, yields have since resumed their upward trajectory as of Thursday.
Equity Allocations Hit Three-Year High Amid Mixed Sentiment
Despite "disorderly bond yield increases" ranking high on the risk list, institutional investors' actual actions tell a different story. Bank of America's survey shows fund managers' stock allocation has reached 56%, a three-year peak.
JC O'Hara, chief technical strategist at Roth Capital Partners, notes that while equities are navigating a rising yield environment, they remain near historic highs, and investors "should be bullish, or at least maintain a positive stance." He points to improving earnings expectations, a favorable economic outlook, and reduced market attention on Middle East tensions as factors driving risk appetite higher. Historically, the S&P 500 tends to deliver stronger forward-looking returns during phases of improving risk sentiment.
Tyler Richey, editor at Sevens Report Technicals, adopts a more cautious tone. In an interview, he describes rising yields as "the elephant in the room," posing a latent threat to a market that has already entered a consolidation phase after hitting record highs.
Yield Curve Shape May Matter More Than Absolute Levels
Some strategists are shifting their analytical focus from absolute yield levels to the shape of the yield curve. Ed Clissold, chief U.S. strategist at Ned Davis Research, noted Tuesday that equities currently sit in the "sweet spot" of the yield curve.
At present, the 10-year Treasury yield stands roughly 49 basis points above the 2-year yield. Clissold defines a "moderately positive-sloped yield curve"—where the 10-year yield exceeds the 2-year by no more than 150 basis points—as the configuration in which the S&P 500 performs most consistently and delivers the richest returns.
Based on NDR's historical data dating back to 1976, the S&P 500 has posted an average annualized return of approximately 11% under this yield curve shape.
The 5% Threshold Is a Widely Acknowledged Psychological Barrier
Even current equity bulls generally concede that if yields continue to climb, they will eventually exert meaningful pressure on the market.
Liz Ann Sonders, chief investment strategist at Charles Schwab's Financial Research Center, states: "Current levels are still tolerable, but I believe if (the 10-year yield) approaches 5%, it could trigger a violent market reaction similar to what we saw in 2023."
Between late July and late October 2023, the 10-year Treasury yield briefly touched 5%, during which the S&P 500 fell a cumulative 10%.
Matt Maley, chief market strategist at Miller Tabak + Co., offers a more succinct take over the phone: "Bond yields start rising, and the stock market chooses to ignore it—until it can no longer ignore it."
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