Why Rising Treasury Yields Are Not Yet A Stock Market Crisis

US Treasury Yields

While the 30-year US Treasury yields reached a new high, the 10-year and 2-year Treasury yields are slightly below the recent high set in early 2025. As one should expect, yields have risen as the US economy has remained resilient. Directionally, the move in yields makes complete sense, though one could argue that yields may have increased more than warranted; that is a judgment call. It seems clear that at least the 2-year and 10-year US Treasury yields aren’t acting in an extreme fashion.

Stock Returns

Rising yields weighed on stocks last week, with the S&P 500 declining 1.4% and smaller companies falling 1.6%. Despite the declines, stocks remain only 1.5% off their all-time highs.

Fiscal Policy

Without exception, the fiscal positions of large countries, including the United States, as measured by government debt relative to GDP, deteriorated due to pandemic-related spending. Most countries had already been increasing their debt relative to economic activity, but the pandemic accelerated this trend.

According to Strategas, once US debt-servicing costs, as a percentage of tax revenues, rise above 14%, there tends to be fiscal strain and austerity. The US passed that interest cost level in July 2023 and is now at around 20%.

No magic debt-to-GDP ratio signals disaster, since countries with more resilient economies can service more debt. Generally, the deterioration in government fiscal health is a global issue. In addition, with yields rising following the pandemic, other countries also face the higher interest costs previously discussed for the US.

Global Yields

Are global yields reflecting growing concerns about government fiscal health? Clearly rising bond yields are a global phenomenon. Notably, the US 30-year yield has risen 0.43 percentage points year-to-date, but the moves in Japan, the UK and Italy are larger. Japan is of particular interest given its combination of a massive debt load and a 30-year bond yield that has risen the most year to date.

Term Premium

The term premium refers to the additional yield demanded by investors for holding longer-term bonds. This premium can include compensation for interest rate risk, inflation uncertainty, credit risk, and other factors. However, at times, the 30-year Treasury yield has been below the 2-year yield. Generally, when this happens, investors seek interest rate risk because they expect short-term interest rates to decline.

The simplest definition of the term premium is to subtract the yield on the shorter-term bond from the yield on the longer-maturity bond. In this case, the 30-year US Treasury minus the 2-year US Treasury. Notably, the term premium tends to be at its lowest or even negative before an economic recession. There are more complex versions of the term premium that seek to identify the components driving its changes. Still, they are highly susceptible to assumptions and provide different answers, so their reliability is suspect.

One measure of long-term expected inflation is the 5-year breakeven inflation rate five years in the future. The calculation isn’t perfect, but it is used to measure long-term inflation expectations by removing short-term inflation trends. Investors in long-term bonds should be concerned about long-term inflation rather than short-term inflation. While the US term premium has risen since mid-2023, these long-term inflation expectations haven’t risen by a large degree. US long-term inflation expectations have risen year-to-date and currently stand at 2.32%.

Returning to a global focus, the term premium between 30-year and 2-year bonds is a mixed bag across the large developed countries analyzed.

The US term premium year-to-date has actually fallen despite the rise in the absolute level of the 30-year yield and does not stand out from the others. Historically, the median US term premium since 1999 has been 78 basis points (0.78%) compared to the current 103.5 basis points. The term premium has been as high as 399 basis points.

Japan is notable, with a current term premium of 239 basis points and a historical median of 165 basis points. Furthermore, Japan’s highest reading was 269 basis points. Japan’s consumer prices rose at a 1.9% year-over-year rate in July and were above 2% from 2023 to 2025 after being zero or negative for much of the period since 1999.

Since many factors impact term premiums, it is impossible to know exactly how much concern about fiscal health is being priced into the increase. Circumstantial evidence suggests that bond investors may be growing weary of funding the growing pile of debt without additional compensation.

Bond Yield Model

A simple model of US 10-year Treasury yields suggests that they should be consistent with US nominal GDP growth. US nominal GDP growth combines the real, after-inflation, GDP measure, which is what most people think of when measuring economic growth, and adds the inflation component back in. While the 10-year yield can deviate significantly in any given period, nominal GDP growth serves as a good signal of the long-term level. In this regard, the 10-year Treasury yield could actually be a bit below where it should be. However, if Goldman Sachs’ estimates of future nominal GDP are correct, yields are very close to where they should be.

Conclusion

The good news is that the rise in US yields does not look extreme in either a historical or a global context, or relative to economic data. Additionally, despite rising yields, the odds of a US recession remain exceptionally low at 8%.

Unfortunately, the decline in governments’ fiscal health is a global issue. The US has the extraordinary privilege of a high per capita GDP, control of the global reserve currency, and the ability to issue debt only in US currency. Since the US can handle significantly more debt levels than most other countries, our bond market should be relatively more insulated from crisis. Like any privilege, it can be misused to the point of being revoked, so one must not be blind to the US debt pile.

The current fiscal trajectory in the US is unsustainable, and the debt service burden has grown large enough to squeeze out other spending. The most pleasant way to address the problem is to expand the economy, thereby increasing the tax base while maintaining spending at a lower rate; however, it is unclear whether policymakers will choose this path. Though likely apocryphal, optimists will point to Winston Churchill purportedly saying, “Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.”

History is littered with countries choosing to devalue their currency through inflation to repay debts with a cheaper currency, so it is little wonder that yields have risen globally. Government bond investors are demanding higher yields on long-term bonds across most countries, which may lead to a shift in markets’ willingness to fund large deficits. The rise in gold could be a signal that markets are concerned about fiscal risk and the possible further depreciation of fiat currencies. The US dollar has recently been depreciating relative to other currencies as well, but not to any extreme level.

All else equal, higher yields are a headwind for stock prices. There are mitigating factors at play today, though. First, rising yields due to better nominal economic growth are typically tolerated more readily, since nominal GDP growth is a primary driver of corporate profits. Rising earnings expectations can offset the higher discount rates demanded by higher yields. Furthermore, stocks are an amazing hedge against the long-term depreciation of fiat currencies. Owning a stake in a profitable, growing business that provides a wanted product or service over the long term is preferable to owning paper currency, which is destined to lose purchasing power over time. The short term is impossible to predict, and stocks are not inexpensive, but the recent rise in yields is not a reason to abandon stocks in and of itself.