JPMorgan warns: U.S. Treasury yields are becoming a "deadly problem" for U.S. stocks.
Bond yields are soaring—can U.S. stocks still hold up?
According to ChaseWind Trading Desk, on May 20th, JPMorgan's global market strategy team released a report pointing out that rising bond yields are becoming an issue for the stock market. The upper limit of interest rates that U.S. stocks can withstand is now right around the corner. If bond yields continue to rise, U.S. stocks may soon be unable to hold up.
Equity risk premium drops to a post-financial crisis low
To understand this, you need to clarify a concept first: Equity Risk Premium (ERP).
Simply put, it’s the additional return you can get by holding stocks compared to bonds. The bigger the difference, the more attractive stocks are; the smaller the difference, the more competitive bonds become.
Their analysts use the Dividend Discount Model (DDM) to estimate the S&P 500’s “stock discount rate” (i.e., implied stock yield), minus the actual yield on the 10-year U.S. Treasury, currently arriving at an equity risk premium of 2.2%.
What does this mean?
- This is the lowest point since the post-financial crisis era, breaking below the previous low from 2007.
- It’s 90 basis points lower than the long-term historical average of 3.1%.
- A high equity risk premium supported the bull market following the 2008 financial crisis. In 2020, the equity risk premium nearly hit a peak of 700 basis points.
Analysts note that the last time the equity risk premium was near zero was at the peak of the tech bubble in 2000. While the current 2.2% isn’t as extreme, the conclusion is: the interest rate ceiling that the stock market can withstand is almost here. If bond yields increase anymore, problems may emerge for the stock market.
Stocks themselves are expensive: about 18% overvalued relative to the past thirty years
It’s not just compared to bonds—the absolute valuation of stocks themselves is also high.
The model shows that the current implied stock yield for the S&P 500 is 4.4%, 60 basis points lower than the 5% average since the mid-1990s.
How big is this 60-basis-point gap? Analysts translate it as follows: Multiply by the roughly 30-year duration, and this equates to stock prices being about 18% overvalued.
The underlying logic: Over the past two decades, actual interest rates have steadily fallen, but the implied stock yield stayed stable around 5%, not declining with rates—which supported stocks’ high premium over bonds. But since 2022, bond yields have risen rapidly, and AI-driven stock surges have suppressed stock yields; squeezed from both sides, the equity risk premium has quickly narrowed.
Who is going long bonds? Who is selling?
Meanwhile, the bond market itself is experiencing intense volatility.
Since the outbreak of the Iran conflict, bond selling has accelerated, and by May global aggregate bond index yields have neared 4%. JPMorgan's implied bond position indicator shows that since late April, the overall bond market is in a “long” position.
Who is going long bonds?
- The 20 largest U.S. actively managed bond funds: Rolling 21-day betas relative to the U.S. aggregate bond index show these funds currently hold overall long-duration positions.
- U.S. balanced mutual funds: Since the Iran conflict, bond betas for these funds have risen to levels significantly above the historical average.
- Relative value fixed income sovereign hedge funds: In recent months, these have shown a clear tendency to go long duration in government bond markets.
Who is selling?
- Risk parity funds: In contrast to balanced funds, risk parity funds have continuously reduced bond beta since the Iran conflict, making them a driver behind bond selling.
- CTA (trend-following hedge funds): Momentum signals show CTAs are accumulating short positions in U.S. Treasuries, amplifying the downward trend in the bond market. Crucially, their current positions are far from extremes, meaning there’s room for further shorting, and the pressure in the bond market has yet to be released.
Another hidden risk in the bond market: yield curve faces steepening pressure
JPMorgan warned about this risk in their April 15 report, and now reconfirms it.
The duration impulse indicator for bond ETF inflows shows retail money flowing into shorter durations, giving insufficient support to the long end. Recently, after a brief stabilization, this negative duration impulse has weakened again, putting steepening pressure on the yield curve.
Additionally, pension funds and insurers have less room for risk-off operations than previously expected—since they’ve already bought a large amount of bonds in 2024 and 2025, remaining potential buying is limited.
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