Bond Market Storm Looms: If Yields Break 6%, U.S. Stocks Could Correct 20%

Long-term U.S. Treasury yields continue to climb, beginning to threaten the upward momentum in U.S. stocks driven by expectations of AI-fueled growth. Wall Street strategists warn that if the 30-year Treasury yield rapidly approaches 6%, the stock market could face a substantial correction.

On Wednesday (the 16th), following the Federal Reserve's rate hikes and Chair Powell's emphasis on persistent inflation risks, the 2-year yield rose to its highest level since 2024, while the 10-year yield returned above 5%, reaching its highest level since July 19, 2007. However, the 30-year yield dipped 1.7 basis points to 5.346%, retreating slightly from its 19-year high reached earlier in the week.

Jonathan Krinsky, Chief Technical Strategist at BTIG, pointed out that the 30-year Treasury yield has broken out of a trading range it had held for about three years. Technically, the chart suggests that bond selling pressure may not yet be over.

Krinsky stated that the stock market is not yet prepared for a rapid rise in long-term yields toward 6%. The speed of the yield increase may pose a greater threat to equities than the absolute level of yields.

Rising yields increase the relative attractiveness of bonds compared to stocks, potentially prompting capital to shift toward fixed-income assets. They also push up corporate financing costs and the discount rates used in stock valuation models, lowering the fair value of equities.

Data analytics platform Oddstats noted that the only previous time the 30-year Treasury yield rose from the 4% range to the 6% range within six months was in June 1999.

Less than four months later, the S&P 500 entered correction territory; nine months later, it hit its final peak at the time, followed by a prolonged bear market as the dot-com bubble burst.

Factors pushing up yields are not limited to inflation and Federal Reserve (Fed) policy. Expanding U.S. fiscal deficits, government debt nearing $40 trillion, and massive bond issuance by tech giants to build AI data centers are all adding supply pressure to the bond market.

Krishna Guha, Head of Economics and Central Bank Strategy at Evercore ISI, noted that U.S. investment-grade corporate bond issuance in the first half of the year increased 27% year-on-year, primarily driven by hyperscale cloud service providers.

Goldman Sachs data shows that AI-related bond issuance has already reached $489 billion. High-grade corporate bonds issued by tech giants are competing with Treasuries for funding. Some investors, when buying corporate bonds, hedge by shorting Treasuries, further increasing selling pressure on government bonds.

Guha argues that if the yield rise were solely due to inflation concerns, the break-even inflation rate (BEI)—which reflects market inflation expectations—should also rise in tandem. However, such a proportional increase is not currently observed, suggesting that bond supply is also a significant factor.

Yulia Alekseeva, Head of Fixed Income at MissionSquare, stated that fiscal deficits are the most important and persistent driver behind the recent sell-off in long-term U.S. Treasuries.

The U.S. government currently spends about $1 in interest for every $5 in revenue. The Congressional Budget Office (CBO) estimates that federal interest payments as a share of GDP will rise to 3.3% this year and could reach 4.6% by 2036—far above the 50-year historical average of 2.1%.

Luis Alvarado, Co-Head of Global Fixed Income at Wells Fargo Investment Institute, noted that fiscal deficits are not unique to the U.S., as nearly all major fixed-income markets face similar trends.

However, the U.S. Treasury market is far larger than other major government bond markets, so its yield fluctuations have a stronger transmission effect on global financial markets.

Chris Verrone, Chief Market Strategist at Strategas, believes that the internal structure of the U.S. stock market is still improving and has not yet reached interest rate levels that would trigger a large-scale withdrawal of capital from equities.

Nevertheless, Verrone warns that when long-term yields and stock prices rise simultaneously, and investors begin to ignore interest rate changes—or even believe that stocks are no longer affected by rates—that is often the stage of highest market risk.