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Treasury yields continued to rise sharply across the curve on Tuesday, sending the yield on the benchmark 10-year note above the closely watched 5% level. The 10-year Treasury yield added 7 basis points to 5.029% by 5 a.m. ET, while yields elsewhere on the curve rose roughly 4 to 6 basis points. Yields on the 20-year and 30-year Treasurys were last seen at 5.434% and 5.391%, respectively. Global yields followed Treasury yields higher, with government borrowing costs rising in Japan, Germany, the U.K., France, and elsewhere. Bond yields and prices move in opposite directions, with 1 basis point equating to 0.01 percentage point. The relationship between stocks and bonds While the moves in the bond market fueled questions about what's in store for the Federal Reserve's two-day September meeting – which begins Tuesday – they also raised concerns about the outlook for global equities. Sovereign bond yields influence borrowing costs not just for the governments that issue them, but also for consumers and businesses. They also have the potential to limit equity valuation growth and weigh on corporate earnings – but their reaction, historically, has depended on what's putting pressure on bonds. Stocks slipped in European and Asian trade on Tuesday, while U.S. stock futures pointed to a negative open after a losing session the previous day. "Equities typically appreciate alongside rising bond yields when the market is raising its expectations for economic growth but struggle when yields rise due to other drivers, like fiscal concerns," Goldman Sachs Research Chief U.S. Equity Strategist David Kostin wrote in a report last year. Much of this year's equity rally – as well as recent volatility – has been driven by investor enthusiasm around AI development, which has been reliant on vast amounts of capital, as well as optimism around earnings momentum. In the bond market, assets have come under pressure from the economic fallout of the Iran war, growing anxiety about mounting government debts and other fiscal concerns. In a note on Tuesday morning, Barclays strategists said higher rates had already pressured valuations and were increasingly putting equity portfolios at risk. "While earnings have so far offset the drag, the approaching 5% threshold in 10Y yields marks a historically important inflection point, beyond which rates have typically become a more persistent headwind for equities," they said. "With inflation risks lingering and yields moving higher, the cushion provided by earnings growth may become increasingly difficult to maintain." "Our base case remains constructive on equities, supported by continued earnings momentum, but the risk of a sharper repricing grows if yields move materially above current levels," they added. Fed in focus However, some market watchers appear undeterred by rising rates. In a note Tuesday, the BlackRock Investment Institute said that although higher global rates are "raising the hurdle for returns" on equities, they "have not knocked us off our pro-risk stance." "Higher rates and strong equities need not be contradictory – what drives yields matters," BII strategists said. "When higher yields reflect stronger investment and growth, the resulting earnings strength can help offset a higher cost of capital. That explains why we maintain our U.S. equity and AI overweights." Carol Schleif, chief market strategist at BMO Wealth Management, said in an email on Tuesday that the Fed has "little choice but to hike rates" this week, since the bond market has been "signaling for weeks that higher rates are warranted." With hot inflation data, strong corporate earnings and a sturdy labor market also at play, Schleif said the stock market would be disappointed if the central bank didn't raise interest rates, noting that elevated energy prices and geopolitical concerns meant high yields "could be here to stay for some time." However, she added that rising bond yields and borrowing costs were "unlikely to slow down corporate America's AI, infrastructure and reshoring spending." "Companies that are borrowing money to invest in AI can handle the recent uptick in borrowing costs relative to their strong double-digit margins. This is one of the reasons why the stock market has handled yields creeping higher – the rise comes from a place of fundamental strength rather than a wage-price push," she said. "We expect chop over the next few weeks in stocks until we are solidly back into earnings season and have fundamentals to lean into," she added. "Stocks are likely to remain volatile through the fall season thanks to high oil prices, bond yields, midterm election uncertainty and the fact that stocks are only slightly off of their all-time highs and are due for a more meaningful pullback of 10%." Florian Spaete, Senior Bond Strategist at Generali Investments, told CNBC in an email Tuesday that the break above 5% in the 10-year U.S. Treasury yield is significant for investors in both fixed income and equities. "It signals that markets are demanding a higher term premium for persistent inflation, fiscal risks, heavy issuance and rising capital demand, rather than treating the sell-off as a temporary overshoot," he said. "For equities, the immediate risk is valuation pressure from higher real yields albeit the yield move reflects also stronger growth and productivity given the very high Tech capex on GDP and corporate increasingly AI adoption in their processes."
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