David Dierking, The Motley Fool
5 min read
The bond market is sending another warning to stock investors. Long-term Treasury yields have surged, with the 30-year yield recently touching its highest level since 2007. The 10-year Treasury yield is also pushing toward its own multi-year high.
Stocks and bonds have responded with some volatility. Treasury Secretary Scott Bessent announced a government intervention that resulted in it buying back bonds on the long end of the curve. But that proved to have little impact on the direction of rates.
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That creates a potential problem for investors. If rising yields continue pressuring both stocks and bonds, is it time to reduce some exposure now?
History suggests long-term investors should probably do the opposite. Remain invested, keep a long-term view, and avoid letting short-term volatility alter a strategy that’s built for wealth creation over decades.
Why the bond sell-off is hitting stocks
Bond prices and yields move in opposite directions, so a yield spike can send prices sharply lower. We’ve seen this especially in long-term Treasuries lately. That’s important for stocks for several reasons.
First, higher Treasury yields give investors a more attractive alternative to stocks. If they can capture higher yields from more conservative fixed-income options, stocks begin to look less attractive.
Higher yields also translate into higher borrowing costs for businesses and consumers. That’s particularly relevant today because huge spending on artificial intelligence (AI) infrastructure is increasingly being financed with debt.
Lastly, higher interest rates can make future corporate earnings less valuable in today’s dollars. That can be particularly problematic for more expensive growth stocks whose valuations depend heavily on profits expected years into the future.
Those are very real risks today. Rising yields can hurt stocks, but there’s an important difference between recognizing market risks and trying to predict what stocks will do next in the short term.
History says volatility is the price of admission for investing in stocks
The S&P 500 has produced an average annual return of roughly 10% over its long-term history. But to earn those returns, you would have had to ride out a number of bear markets, recessions, and major economic events.
