Bond yields are in the 'danger zone.' Here's why that's not hurting the market - yet.

By Jules Rimmer

Bond yields are higher than ideal, but risk assets seem unmoved

At north of 5%, the long end of the U.S. Treasury yield curve has already entered what analysts at HSBC are calling the "danger zone." Yet despite this pressure on bond markets, the impact on stocks and risk assets in general has been relatively limited - so far at least.

So do bond yields no longer matter for stock markets?

That's the question posed by Max Kettner, HSBC's chief multi-asset strategist, in a research note published Thursday. His conclusion is that while there has been some damage "beneath the surface," there are two good reasons the pain has not been more pronounced and widespread.

First, while soaring bond yields are in the danger zone, the volatility of U.S. rates is much lower than the comparable rises in the long bond yield BX:TMUBMUSD30Y seen in 2024 and 2025. Put simply, the increase has taken place more slowly and steadily, allowing investors to adjust and recalibrate their portfolios.

U.S. Treasury yields are deep in the danger zone, but volatility is relatively low.

Second, the surprisingly robust first-quarter earnings season has partly compensated for the damage caused by higher rates. More than half of the weighting of the S&P 500 SPX is made up of artificial-intelligence and technology stocks, and their "close-to-100% earnings per share beat rate, coupled with strong forward guidance, is therefore cushioning the overall U.S. equity market," Kettner wrote.

The uptick in earnings revisions has coincided with the rise in Treasury yields, and that has provided a buffer for stocks, credit and risk assets overall.

Kettner and his team emphasized, however, that market breadth has become very narrow, with a small number of stocks driving the index higher, while a far larger group of stocks head south.

For example, the cap-weighted S&P 500 rose 4.6% in the last month, while the equal-weighted S&P 500 XX:SP500EW declined 0.1%. Moreover, high-volatility momentum stocks - those that are more sensitive to moves up or down in the wider index - plunged 18% in the week of May 13-19 as the U.S. 30-year bond sold off by 25 basis points. A similar dynamic was applicable for high-volatility stocks in other developed and emerging markets EEM.

Tech and AI stocks are driving the S&P 500.

Kettner and his team delivered one final insight: Big policy changes from the Trump administration in the last year, such as the softening of tariff policies or the halt to attacks on Iran, have been driven by bond-market considerations, rather than any weakness in the stock market.

Bond yields that are high and threatening to go still higher could paradoxically have a positive effect if they force the hand of combatants in the Middle East to reach an agreement to end hostilities.

-Jules Rimmer

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05-21-26 1014ET