Will a 5% yield on 10-year U.S. Treasuries definitely sink U.S. stocks?
"Yield is never an island," and the process of reaching 5% is more important than the result. UBS pointed out that if driven by expectations of economic growth, the S&P 500 index could rise to 6,200 points; however, if caused by an increase in term premium, the stock market will face significant pressure
If U.S. Treasury yields rise to 5%, will U.S. stocks necessarily come under pressure?
According to news from the Chase Wind Trading Desk, UBS's latest report points out that the key factor is not the U.S. Treasury yield itself, but how it rises. The "path of yield increases" driven by economic growth or risk premium has distinctly different impacts on the stock market.
The report emphasizes that if driven by economic growth and improved corporate earnings expectations, the S&P 500 is expected to rise to 6,200 points; if driven by rising risk premiums (such as fiscal deficits and policy uncertainty), it will put pressure on U.S. stocks, especially defensive sectors.
The path of yield changes is more important than the final value
If we talk about U.S. bond yields rising to 5% or higher, the process of reaching that target will be crucial.
The UBS report states that the 10-year U.S. Treasury yield is an important anchor for global risk-free rates and a core parameter for discounting cash flows in the stock market. When this rate rises, the present value of future cash flows declines, thereby putting pressure on stock valuations. However, the market does not adjust statically; changes in yields often occur simultaneously with other variables, such as corporate earnings expectations, risk premiums, and the macroeconomic environment.
"Yields are never an island," the UBS strategist team emphasizes. Changes in the 10-year U.S. Treasury yield typically fluctuate in tandem with two core elements of stock valuations—risk premiums and earnings expectations. The dominant factors driving yields upward ultimately determine the direction of the stock market.
If driven by term premium, it will be a nightmare for the stock market
UBS states that the most concerning factor currently is the abnormal expansion of the term premium (the risk compensation investors require for holding long-term bonds). This could be the most unfavorable scenario for the stock market.
An increase in the term premium often reflects heightened uncertainty, expanding fiscal deficits, and other factors, leading to a deterioration in overall market sentiment and significant pressure on the stock market.
Uncertainty, fiscal deficits, debt burdens, and potential suppressive factors on U.S. inbound investment portfolio flows (Section 899 of the budget proposal) are causing investor concerns and pushing up the term premium wave after wave. This could be the easiest yet worst way for U.S. Treasury yields to reach 5% (for the stock market).
Currently, the term premium only needs to rise by 50-60 basis points to push U.S. Treasury yields to 5%.
UBS states that historical data shows that yield increases driven by factors detached from fundamentals have the most destructive impact on the stock market, particularly affecting defensive sectors such as utilities, consumer staples, and healthcare.
If driven by economic growth and inflation, the S&P is still expected to rise to 6,200 points
UBS presents another optimistic scenario: the Atlanta Fed's GDPNow model shows that the U.S. economy may grow at a rate of 3.9% in the second quarter, combined with tariff revenues translating into fiscal stimulus and effective manufacturing return policies, potentially forming a positive cycle of "growth-inflation-earnings."
In this context, even if the 10-year yield rises to 5% due to the increase in real interest rates (+32bps) and inflation expectations (+15bps), the S&P 500 is still expected to rise by 5% to 6200 points within 3 months.
UBS believes that if the U.S. economy remains resilient, tariff revenues support fiscal stimulus, and drive non-residential investment and manufacturing capacity expansion, then even if the 10-year U.S. Treasury yield reaches 5%, it may be accompanied by stronger earnings growth expectations.
In this scenario, cyclical sectors such as aviation, mining, and consumer discretionary are expected to outperform the market, while gold miners may weaken.
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