Why Haven't Stock Markets Crashed Despite Surging U.S. Treasury Yields? Experts Explain the Breakdown of Traditional Stock-Bond Logic in the 'New Economic Era'

Recently, financial markets have exhibited two notable contradictory phenomena: long-term U.S. Treasury yields continue to rise, with the 30-year yield briefly exceeding 5.30%, reaching a 19-year high, yet stock markets have not weakened. The S&P 500 remains close to its recent all-time highs. Traditionally, rising bond yields are expected to increase corporate funding costs and raise the discount rate for future earnings, thereby suppressing stock valuations. Conversely, when stock markets fall and risk aversion rises, capital typically flows into bonds, pushing up bond prices and lowering yields. However, this historical negative correlation between stocks and bonds has become significantly less reliable in recent times.

Another puzzle lies in valuation. Since equities carry higher risk than government bonds, theoretically, the earnings yield on stocks (earnings per share divided by price) should exceed the risk-free rate. Yet currently, the 10-year U.S. Treasury yield is near 4.70%, while the earnings yield on U.S. stocks suggests equities are relatively expensive compared to bonds by historical standards.

Some argue that markets must be mispriced—either bonds are too cheap, stocks too expensive, or investors have lost rationality. But there’s another possibility: markets may still be pricing rationally, but investors are using outdated economic frameworks to interpret today’s environment.

Wei Li, BlackRock’s Global Chief Investment Strategist, wrote in the Financial Times that the past decades’ 'Great Moderation' era—roughly from the 1980s to around 2020—was a demand-driven economic environment. Globalization, China’s rise, and supply chain efficiency ensured supply could generally keep pace with demand. Economic expansions were marked by loose credit, rising corporate confidence, and increased consumer spending; recessions were the reverse. In this context, economic cycles were primarily driven by demand fluctuations, allowing central banks to stimulate demand via rate cuts to mitigate downturns. Lower interest rates reduced bond yields and raised bond prices, enabling bonds to serve as a 'safe haven' during stock market declines.

However, the investment landscape has shifted dramatically over the past five years. Labor supply is tightening, energy security has become a strategic priority, and countries are restructuring supply chains—shifting from efficiency to resilience. At the same time, governments are significantly increasing spending on defense, infrastructure, and industrial policy. Aging populations, geopolitical tensions, and energy transitions are making supply expansion more difficult.

In this new environment, demand remains important, but sustainable economic growth increasingly depends on 'the ability to produce more,' not just 'the ability to spend more.' This implies that inflation dynamics are changing. In the past, inflation typically cooled as economies slowed. Today, central banks can suppress demand via rate hikes but cannot increase supply of electricity, labor, or semiconductors through monetary policy alone. When supply becomes the bottleneck, the traditional negative stock-bond correlation naturally weakens.

Wei Li argues this explains the persistently high long-term U.S. Treasury yields. Markets often interpret rising yields as signs of monetary tightening or overheating demand. But the current rise in long-term yields may reflect a structural shift: in a supply-constrained economy, the cost of capital itself is rising.

A major driver is the AI investment boom. Investment in AI infrastructure is accelerating beyond an already record-setting investment cycle. Meanwhile, the U.S. government’s expanding borrowing intensifies competition for capital between the public and private sectors. Market concerns over widening U.S. fiscal deficits and how the Federal Reserve will respond to recurring supply-driven inflation are further pushing up long-term yields.

The key question is whether rising capital costs necessarily hurt stock markets. Wei Li’s answer is no. If higher yields are driven by an investment surge that boosts long-term productivity and corporate earnings expectations, then higher borrowing costs may not outweigh the market’s optimism about future growth.

This is precisely the core expectation reflected in current stock prices: investors are betting on further productivity gains, sustained above-average corporate profits, and the potential for the economy to break through its long-term growth trend. This suggests traditional asset allocation frameworks need reevaluation.

U.S. Treasuries may no longer reliably serve as a hedge during equity volatility, as they did in the Great Moderation era. On the other hand, at current yield levels, bonds now offer attractive income without requiring investors to take on excessive credit or interest rate risk.

For investors, rather than debating whether stocks or bonds are mispriced, the real question may be whether traditional stock-bond allocation and valuation models—built on demand-driven economics—are still sufficient to explain a new economic era shaped by supply constraints, AI investment, government spending, and the race for productivity.