The deepening sell-off in the bond market could soon be a much bigger drag on stocks.
It may not be long before the sell-off rattling government bonds this week spreads to the stock market, Wall Street analysts are warning.
Bond turmoil has dominated market headlines this week, with Treasury yields spiking to levels not seen in decades. A grim cocktail of macro, fiscal, and geopolitical concerns has spurred the latest leg down, and investors fear the next shoe to drop will be in the stock market.
Yields influence borrowing costs for a wide range of consumer and business loans, including mortgages, credit cards, and auto loans.
Higher yields also pressure stocks by offering a viable alternative in the form of “risk-free” returns. The thinking goes that locking in a 5% yield for a few years might be preferable to risking money in the equity markets.
Consumers are feeling the pain of higher rates in the mortgage markets, where the average rate on a 30-year home loan broke through 7% for the first time in two years this week.
The warnings are piling up enough for major market commentators to take notice and issue warnings of what might come next.
Steve Eisman, one of the traders made famous by “The Big Short,” said a correction is looming unless yields swiftly drop back below 5%.
“A market correction seems imminent,” Eisman wrote in a note on Substack as the bond sell-off accelerated Thursday morning. “It looks like 5% is the Rubicon for the market. Higher rates increases the deficit. It harms the housing market. And it hurts the AI story, which is now a story partially about leverage,” he added, referring to the loads of AI debt being issued by tech giants.
Another concern has been that higher yields offered by “risk-free” Treasurys could compete with the bonds being issued by Big Tech firms funding their AI ambitions. If hyperscalers need to sweeten the deal with higher yields to entice investors, it could skew the economics of AI projects at a time when the market is already worried about returns on capex.
Farzin Azarm, a managing director at Mizuho Securities, also flagged the risk of a “serious correction” in the last week, pointing to bond market volatility as one potential factor.
“I’ve been saying this for some time, that eventually the bond market speaks very loudly and the markets will react,” he said on CNBC.
Higher yields are just one of several contractionary forces that could slow the economy to a crawl, Jim Paulsen, a veteran Wall Street strategist, wrote in a note on Substack this week.
“Expect weaker economic growth, rising recession fears (although probably no actual recession), lower—not higher — bond yields, and a more challenging stock market in the coming months,” he said, pointing to tighter financial conditions.
Economist Henrik Zeberg said the end of the AI bull market appears to be closer given the moves in bond yields. In a post on Substack laying out his updated markets outlook, he pointed to parallels he sees to 2007.
He said that he’s looking for yields to cool off from their current levels to signal a “Blow-Off Top” in markets, after which he would expect a double-digit decline in tech stocks.
“The final leg is ahead of us,” Zeberg said, adding that swings in the market going forward could be “violent.”