If Treasury yields keep climbing, stocks won't be spared — they'll likely suffer more.
We're a debt-driven economy. The cost of money matters. Companies that borrowed at 2–3% in 2020–2021 now face refinancing at 5–7%. When interest expense doubles or triples, something has to give: layoffs, lower capex, reduced investment.
Higher yields don't stay in the bond market. They bleed into the real economy.
There's also the asset allocation problem. If the 10-year hits 8%, how much capital rotates out of equities into risk-free Treasuries? That shift is already underway. The higher yields go, the more attractive fixed income becomes.
But here's the paradox: higher rates create the conditions for lower rates.
If yields rise far enough, they destroy demand. Growth slows, companies cut spending, unemployment rises, inflation weakens. You get disinflation or deflation. High rates cure high rates the same way high oil prices cure high oil prices — by killing demand.
If yields became extreme and triggered a deep recession, you'd initially see pressure across every asset class as investors scramble for liquidity.
But eventually those high bond yields become irresistible.
If inflation falls to 1–2% while the economy is in recession, investors won't ignore Treasuries yielding 5–6% or more. Money pours into bonds, pushing yields lower and prices higher.
So if bonds get crushed first, be careful what you wish for. The mechanism that crushes bonds could hit stocks harder — and set up bonds as one of the best trades on the other side.
$TLT $BND $SPY $QQQ
We're a debt-driven economy. The cost of money matters. Companies that borrowed at 2–3% in 2020–2021 now face refinancing at 5–7%. When interest expense doubles or triples, something has to give: layoffs, lower capex, reduced investment.
Higher yields don't stay in the bond market. They bleed into the real economy.
There's also the asset allocation problem. If the 10-year hits 8%, how much capital rotates out of equities into risk-free Treasuries? That shift is already underway. The higher yields go, the more attractive fixed income becomes.
But here's the paradox: higher rates create the conditions for lower rates.
If yields rise far enough, they destroy demand. Growth slows, companies cut spending, unemployment rises, inflation weakens. You get disinflation or deflation. High rates cure high rates the same way high oil prices cure high oil prices — by killing demand.
If yields became extreme and triggered a deep recession, you'd initially see pressure across every asset class as investors scramble for liquidity.
But eventually those high bond yields become irresistible.
If inflation falls to 1–2% while the economy is in recession, investors won't ignore Treasuries yielding 5–6% or more. Money pours into bonds, pushing yields lower and prices higher.
So if bonds get crushed first, be careful what you wish for. The mechanism that crushes bonds could hit stocks harder — and set up bonds as one of the best trades on the other side.
$TLT $BND $SPY $QQQ