Will US 10-year bond yield crossing 5% really hurt markets? Yes Securities says fears overblown

While doomsday prophets continue to raise the alarm and spook investors about negative implications for equity markets and interest rate scenarios if the benchmark 10-year US Treasury yield crosses 5%, some analysts feel the fears are overblown.

The 10-year US Treasury yield has risen above 4.9% and is marching towards the crucial 5% level that it had last hit briefly in 2023. Yes Securities issued a contrarian bet, saying the rise in global yields increasingly reflects stronger nominal growth, a structurally higher equilibrium real rate and synchronised global monetary normalisation, rather than deteriorating economic fundamentals or an imminent fiscal crisis.

US nominal growth, resilient consumption and robust corporate earnings provide sufficient cash flow growth to absorb a higher discount rate, while the rise in US r-star to 1.65% supports a structurally higher cost of capital, the brokerage said. It added that markets are already pricing two to three Fed rate hikes over the next year, but this should represent monetary normalisation rather than a financial accident, particularly with credit markets and Treasury demand remaining well behaved.

Also read | Bigger market crash ahead? Analysts weigh how Sensex, Nifty may react if US 10-year bond yield touches 5%

How current environment differs from 2008 financial crisis

Artificial intelligence-led investment in data centres, semiconductors, power and digital infrastructure represents a genuine capex and productivity catalyst, distinguishing the current cycle from the post-Great Financial Crisis period of predominantly liquidity-driven asset inflation, Yes Securities said.

It further noted that strong interest-coverage ratios across major technology companies and contained credit spreads provide additional balance-sheet resilience, while synchronised rate increases globally reduce the risk of a destabilising dollar or emerging market shock.

Will rising bond yields cause a big market crash?

In this background, the domestic brokerage feels a 5% Treasury yield need not be restrictive for equities if corporate revenues and earnings continue to grow, as stronger cash flows can offset a higher discount rate.The domestic brokerage’s base expectation is for the US 10-year Treasury yield to remain within a 4.7-5.2% range, which it views as tolerable cost of capital in a higher growth economy, rather than an equity-market breaking point. The risk profile changes materially only if yields sustainably move towards 6-7%, which would likely signal de-anchored inflation expectations, deteriorating fiscal credibility or a significant increase in rstar, potentially overwhelming earnings and nominal GDP growth, it warned.

Also read |Aswath Damodaran calls Fed rate debate pointless, says stock market adapts quickly to higher rates

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.