The impact of 10-year bond yields on equity markets
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Fact-Check: Do Rising 10-Year Bond Yields Always Crash the Stock Market?
The Common Belief: Higher 10-Year Yields = Stock Market Doom
A widely held assumption in financial circles is that rising 10-year Treasury yields are a death sentence for equities. The logic appears simple: when bond yields rise, borrowing becomes more expensive, making corporate debt costlier and future earnings less attractive in discounted cash flow models. Investors supposedly flee risky stocks for the safer, higher yields of bonds, leading to a market downturn.
But is this really how things work? Or is this an oversimplified myth that ignores historical nuance and economic context?
Let's investigate.
Step 1: The Theory Behind the Assumption
The core argument linking bond yields to stock performance rests on three key economic principles:
- Discount Rate Effect: Higher bond yields increase the discount rate used in valuing future corporate earnings, reducing stock valuations.
- Opportunity Cost Effect: When bond yields rise, bonds become more attractive relative to stocks, leading investors to shift capital away from equities.
- Economic Growth Expectations: Rising yields are often a sign of stronger economic growth, which can be either good or bad for stocks, depending on inflationary pressures.
This theoretical foundation seems convincing—but does real-world data support it?
Step 2: What the Data and History Show
Case Study 1: The 2013 "Taper Tantrum"
In 2013, when the Federal Reserve hinted at tapering its bond-buying program, the 10-year yield spiked from 1.6% to 3% in six months. The stock market? It continued rising, with the S&P 500 gaining over 25% that year.
Case Study 2: The 2016-2018 Rate Hike Cycle
Between 2016 and 2018, the Fed raised rates multiple times, causing the 10-year yield to climb from 1.5% to 3.2%. Contrary to expectations, stocks rallied for most of this period, with the S&P 500 reaching record highs in early 2018. However, when yields climbed too fast, markets briefly corrected in late 2018.
Case Study 3: 2022-2023 Yield Surge
During 2022, 10-year yields skyrocketed above 4%, triggered by aggressive Fed tightening. This time, equities did decline, with the S&P 500 falling nearly 20%. But was it just the yields? Not quite—runaway inflation and aggressive rate hikes were the real catalysts.
Step 3: What Experts Say
- Cliff Asness (AQR Capital Management): "Stocks don’t just fall when rates rise. The context—why yields are rising—matters more than the rise itself."
- Michael Hartnett (Bank of America): "Fast, disorderly jumps in bond yields hurt stocks. Gradual increases in yields tied to stronger economic growth are actually stock-friendly."
- Campbell Harvey (Duke University, Yield Curve Expert): "The relationship between yields and stocks isn't linear. The problem is when rising yields signal excessive tightening or recession risks."
Step 4: The Final Verdict
✅ Partially True: Rising 10-year yields can hurt stocks, but only under specific conditions—mainly when the rise is rapid, unexpected, or signals monetary tightening that chokes economic growth.
❌ False as a Universal Rule: Stocks have often rallied alongside rising yields, especially when increases reflect a growing economy rather than excessive Fed tightening.
🔍 Still Uncertain: The exact threshold where rising yields become problematic varies across market cycles. Some research suggests that when yields exceed 4-5%, equity markets struggle—but even this isn't a hard rule.
