Soaring U.S. Treasury Yields Weigh on Equities, Institutions Warn of Heightened Market Risks

U. S. stock markets faced heavy selling pressure last Friday as spiking government bond yields derailed the AI-driven rally. All three major U.S. equity benchmarks tumbled over 1%, retreating sharply from record highs set earlier in the week.

Yields on 30-year U.S. Treasuries have surged above 5% in recent weeks. Since early May, the 10-year yield has jumped more than 20 basis points to hit 4.59%.

source：trading eco

Dominic Papalardo, Chief Multi-Asset Strategist at Morningstar Wealth, issued a stern warning over the bond market outlook.

“There are very few catalysts out there right now that can stop bonds from selling off further. I would not be surprised at all to see the 10-year Treasury yield hit 5%.”

Three Core Drivers Keep Yields Elevated

Persistent inflation concerns April U.S. CPI rose 3.8% year-on-year, the steepest increase since 2023, mainly driven by climbing energy costs. Prolonged geopolitical tensions keep oil prices elevated, stoking worries that high inflation will become entrenched. Papalardo added that even full reopening of the Strait of Hormuz would take months to restore oil output and shipping flows to full capacity. Official estimates from the U.S. Energy Information Administration also suggest oil supply disruptions will last well into late 2026.

source:EIA

Self-reinforcing negative fiscal loop Elevated energy prices push borrowing costs higher, forcing the U.S. government to issue more debt to cover interest expenses. Greater bond supply in turn lifts yields further, forming a vicious cycle. U.S. federal debt is nearing $39 trillion, with annualized interest expenses reaching $1.23 trillion for the 2026 fiscal year.

Hawkish policy stance from the new Fed leadership Kevin Warsh officially took office as Fed Chair on May 15, having previously opposed excessive balance sheet expansion. The Fed has already trimmed its T-bill purchase program down to roughly $10 billion in mid-May. Less official buying removes major institutional demand and fuels further yield upside.

Oil Prices Remain the Top Macro Variable

Escalating Middle East conflicts continue to lift energy costs and inflation expectations. On May 18, Brent crude topped $111 per barrel amid drone attacks on UAE nuclear facilities and growing fears of direct U.S.-Iran military confrontation.

JPMorgan issued a grave market alert, warning severe oil supply disruptions could push Brent crude to $150 per barrel, lift U.S. inflation to 4% and lock the Federal Reserve on hold until 2027. The bank’s global commodities chief noted global oil supply losses have reached 13.7 million barrels per day, accounting for 14% of total worldwide demand.

U.S. Equities Face Severe Valuation Compression

Rising long-term bond yields pose notable downward pressure on growth stocks. Higher risk-free rates discount future corporate earnings sharply and raise overall corporate financing costs.

Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital Markets, pointed out huge downside risks for major stock indexes. “If the 10-year Treasury yield climbs to 5%, broad U.S. equity valuations will face substantial compression. Under high inflation and elevated rate scenarios, the S&P 500 could drop from 7,900 points down to 7,400 points, and further slide to 6,300 points if corporate earnings shrink by another 5%.”

Market structure has also become extremely fragile. The top ten heavyweight constituents of the S&P 500 now make up over 40% of total market capitalization, far exceeding the 27% seen during the 2000 tech bubble.

Priya Misra, Portfolio Manager at JPMorgan Asset Management, commented on the shifting market sentiment. “Once the 10-year U.S. Treasury yield breaks above the 4.5% psychological level, systemic risks become prominent, putting pressure on all risk assets. Financial conditions keep tightening, shifting market focus from pure inflation pressure toward stagflation risks.”

Goldman Sachs strategists stated current market risk appetite and momentum indicators stand at extreme historical levels, leaving limited room for further upside. Michael Hartnett from Bank of America also reminded investors that early June will likely become a major window for large-scale profit-taking across global stock markets.