The recent selloff in long-dated US government bonds has pushed the 10-year Treasury yield above 5%, the highest level since 2007. As a critical anchor for global risk asset pricing, this shift is redefining the relative appeal of stocks versus bonds. However, JPMorgan strategist Grace Peters says that even as rising bond yields raise the bar for earnings growth, stocks are still poised to climb further.
Why 5% Matters: A Dual Test for Stocks and Bonds
On Thursday, the bond selloff deepened further, with the longest-dated US government bond yields rising to the highest in more than two decades, and the 10-year Treasury yield reaching a level unseen since July 2007. European yields also moved higher in tandem. The 10-year Treasury yield matters to global markets not only because it represents the US government's borrowing cost, but also because it serves as the key risk-free rate benchmark in stock and bond valuation models.
Peters attributes the drivers of this round of rising bond yields to three factors: strong growth data, new debt supply entering the market to finance artificial intelligence (AI) infrastructure, and inflation concerns triggered by oil prices above $100 per barrel. If these macroeconomic headwinds do not subside, the 10-year yield will remain stubbornly elevated. This is typically bearish for stocks and a double-edged sword for bonds.
When the 10-year Treasury yield breaks above 5%, it becomes more attractive as a safe, higher-yielding income investment than most dividend stocks and ETFs. The S&P 500's aggregate dividend yield is only about 1%, while the Schwab US Dividend Equity ETF (SCHD.US) has a trailing 12-month dividend yield of roughly 3%. Many income-oriented investors may sell stocks and shift into short-term Treasury bills. At the same time, many high-growth stocks are still trading at premium valuations. In a low-rate environment, investors are willing to pay a premium for future growth, and companies can easily borrow to expand; but rising rates compress valuations, push investors toward more conservative assets, and drive up borrowing costs. As a result, rising Treasury yields typically create headwinds for high-valuation growth technology stocks.
The bond market is not immune either. Higher Treasury yields make newly issued government debt more attractive to income investors. Corporate bonds must also be issued at higher yields to keep pace with Treasuries, drawing more attention. But the market prices of older bonds issued at lower rates will fall, because higher-yielding bonds are entering the market. For example, a bond previously issued with a 3% coupon could see its price per dollar of face value drop from $1.00 to $0.80 as rates rise. For long-term investors, this temporary decline does not matter, because holding to maturity will still return $1.00 per dollar; but short-term traders planning to sell before maturity will face pressure. Higher rates and Treasury yields hurt bonds less than stocks, but they still erode the value of older bonds and push investors toward newly issued higher-yield bonds.
Why JPMorgan Still Sticks With a Bullish View on Stocks
Against the backdrop of elevated yields, Peters believes fixed income still has a place in portfolios, but it must be carefully selected; compared with that, however, she is more bullish on stocks and expects the market to enter an "expanding earnings super-cycle." "Our conviction is indeed in stocks, and stocks will become the growth engine of the portfolio," she said. She noted that the stock market has not been complacent about rising yields. The 10-year Treasury yield has moved about 40 basis points this month, "which is not yet enough to really stir the stock market at a two-standard-deviation level, but stocks will clearly stay alert, and I think they have already digested a large part of it." Peters expects that currently elevated earnings expectations will be met and could be further revised upward when looking ahead to 2027. She advises investors to focus on companies with pricing power and high visibility in earnings streams.