Bond market analysis: Are rising long-term yields no longer a threat to equities?

Andreas Steno Larsen of Real Vision and NowcastIQ contends that traditional bond market signals no longer reliably predict equity performance in today’s economic environment. Historically, rising long-term yields signaled tighter financial conditions, reducing corporate earnings value and often preceding market downturns. However, Larsen argues this relationship may have weakened in the post-COVID era, where structural factors like higher inflation volatility and persistent fiscal expansion are altering macroeconomic dynamics. The yield curve’s behavior has deviated from historical recession signals, such as steepening after inversion, which previously preceded downturns like the dot-com crash and Global Financial Crisis. Despite the curve’s post-2022 steepening, an expected recession failed to materialize, suggesting the macro regime itself has changed rather than the relationship temporarily breaking down. Larsen proposes that rising long-term yields could now support parts of the financial system, particularly commercial banks that profit from borrowing short and lending long. A steeper yield curve enhances their ability to generate carry and improve profitability through maturity transformation, contrasting with the flattened curves seen during quantitative easing, which suppressed term premia. The analyst cites Japan’s yield curve control policy as an example of how suppressed yields weakened traditional banking models. With long-term yields rising more freely, the curve may be normalizing, restoring healthier incentives for credit creation. Larsen concludes that investors should reassess how they interpret bond yields, as relationships that held for decades may no longer apply in the current economic regime.