Something unusual has happened on Wall Street. Long-term Treasury bonds have been in a bear market for nearly six years, while stocks have powered through one of the strongest bull markets in history.
For decades, investors have relied on a basic rule: higher bond yields should make stocks less attractive and put pressure on valuations.
But this time, Treasury yields keep rising. Stocks keep climbing.
The Size Of The Split
The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), the most widely traded proxy for long-dated government debt, closed Friday at $82.88.
That is about 50% below its July 2020 monthly close of $171, and it remains down roughly 4.9% so far this year.
The SPDR S&P 500 ETF Trust (NYSE:SPY) closed the same session at $769.35, up 12.8% year to date and about 136% since that 2020 bond peak.
Bond Yields Reflect Growth, Not Threat
Ed Yardeni, president of Yardeni Research, said the market is treating rising yields as confirmation rather than warning.
“For now, investors are reading higher yields as a sign of economic growth,” Yardeni said in a note to clients on Monday.
He places the 10-year yield toward the upper end of a 4.00%–5.00% band he calls “the old normal,” the range that prevailed before the era of near-zero interest rates.
He also said forward revenue per share, a measure of what analysts expect companies to generate over the next 12 months, is accelerating worldwide.
If yields are climbing because activity is strong, profits climb alongside them.
The hurdle gets higher, but so does the jump.
Why The Long End Is Under Pressure
Lawrence Gillum, chief fixed income strategist at LPL Financial, says the recent rise in Treasury yields reflects several forces:
- Persistent fiscal deficits
- Heavy Treasury issuance
- Inflation pressures and
- The enormous investment required to build AI infrastructure.
Federal debt crossed $40.05 trillion on Aug. 18, according to Treasury Department data. Net interest costs now run above $1 trillion a year, more than the government spends on defense.
But LPL’s research offers an even more important clue.
Its analysis found that roughly 35 basis points of the increase in the 10-year yield since the start of the Iran conflict were driven by higher growth expectations. Only about 15 basis points were attributable to higher inflation expectations.
In other words, the bond market is not simply saying the economy is becoming more inflationary.
It is also saying the economy may be stronger than investors previously expected.
The Bond Bear May Not Be Finished
John Roque, head of technical strategy at 22V Research, said rates will stay biased higher for longer than most investors expect.
“Rates are going to be biased higher for longer than most believe,” Roque said.
He described the position as something close to a lonely crusade.
Almost nobody trading today has worked through a genuine high-yield regime like the one that ran from 1976 to 1981.
Markets have already shifted from pricing rate cuts to pricing rate hikes in the months ahead.
Will The Bond Market Have The Final Word?
There is a limit to the argument that stocks are unaffected by higher bond yields. Yardeni’s valuation model suggests stocks can absorb a 10-year Treasury yield around current levels.
But his analysis becomes much less comfortable above 5%. At that level, the model implies a forward price-to-earnings ratio of about 20, leaving little valuation cushion.
That is the key investment question now.
Stocks can tolerate higher yields when those yields reflect stronger earnings growth.
They cannot tolerate them indefinitely if bond investors start demanding higher compensation due to inflation, deficits, and Treasury supply.
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