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

Are rapidly rising bond yields necessarily bad for stock markets? 

The traditional view is that rapidly rising long-term bond yields are negative for equities and broader risk assets. Higher yields increase borrowing costs for companies and consumers, reduce the present value of future corporate earnings through higher discount rates, and often signal tighter financial conditions ahead.

Historically, sharp rises in bond yields have frequently preceded equity market weakness, particularly when driven by aggressive central bank tightening or fears of persistently high inflation.

This relationship became deeply embedded in macro investing frameworks during the long structural bond bull market that dominated the four decades before COVID, when falling yields consistently acted as a tailwind for both equities and economic growth. However, Andreas Steno Larsen of Real Vision and NowcastIQ  argues that investors may now be misapplying those historical frameworks to a fundamentally different regime.

A different point of view

Andreas Steno Larsen argues that investors may be misreading today’s bond market because most traditional macro frameworks were built during the four-decade structural bull market in bonds.

Larsen contends that if the world has now shifted into a structural bear market for bonds, then many long-standing assumptions about the yield curve, recession signals, and cross-asset relationships may no longer hold in the same way.

He suggests that the sharp rise in long-term yields is unsettling markets, but not necessarily for the reasons most investors assume. According to Larsen, “relationships that held up throughout forty years of declining yields may not behave the same way in a world defined by persistent fiscal expansion, higher inflation volatility, and structurally higher term premiums.” He therefore believes investors should reconsider how they interpret the long end of the curve in the post-COVID era.

Is the yield curve’s recession warning signal no longer working?

A central part of Larsen’s argument is that the yield curve has recently failed to deliver the recessionary signals that historically accompanied curve “uninversions.”

Traditionally, a steepening after inversion has often preceded economic downturns, as seen before the dot-com crash and the Global Financial Crisis. Yet after the 2022 inflation shock, the curve began steepening again without triggering the recession that many macro analysts expected.

Larsen notes that markets spent years pricing in a downturn that never fully materialised, despite the curve behaving in line with historical recession patterns. He argues this repeated disconnect is important because it may indicate that the macro regime itself has changed rather than the relationship temporarily malfunctioning. In his view, the post-COVID environment has altered the mechanics linking bond yields and economic growth.

Rather than viewing higher long-term yields as automatically destructive, Larsen suggests they may actually support parts of the financial system. He highlights that commercial banks fundamentally operate by borrowing short and lending long. A steeper curve therefore improves banks’ ability to generate carry and profitability through maturity transformation.

During the era of quantitative easing, central banks compressed term premia and flattened the yield curve, which in Larsen’s opinion undermined the traditional banking model. Now that long-term yields are rising more freely again, he believes the curve is beginning to “normalise” and restore healthier incentives for credit creation. He writes that the banking system “quietly prefers a world where the curve actually slopes again, rather than one where it is pinned flat by design.”

Japan as an example

Larsen points to Japan as a real-world example of this process. Under the Bank of Japan’s yield curve control policy, Japanese yields were heavily suppressed for years, limiting the profitability of traditional banking activity. However, as the Bank of Japan (BoJ) gradually loosened its grip on the long end after COVID, the Japanese curve began to steepen.

Larsen argues this coincided with a revival in private credit creation and improved earnings dynamics within the banking sector. Importantly, he notes that Japanese equities also performed strongly during this period of rising long-term yields. The Nikkei enjoyed one of its strongest runs in decades even as bond yields repriced significantly higher. For Larsen, this demonstrates that risk assets can still perform well in an environment of rising yields if the private credit cycle remains healthy.

Why private credit creation matters

A major theme throughout Larsen’s analysis is that private credit creation may now matter more than long-term bond yields themselves. He argues that the relationship between the 2s10s curve and various real-economy indicators has changed markedly since COVID.

As one example, he highlights the inversion of the historically stable relationship between the ISM Orders/Inventories ratio and the yield curve. While he admits this could eventually prove to be temporary noise, he increasingly believes it reflects a deeper structural shift in rates, liquidity, and term premia. According to Larsen, the private sector has effectively taken over as the main engine of money and credit creation, reducing the economy’s dependence on central bank balance sheet expansion.

He also argues that Federal Reserve (Fed) policy itself has contributed to this new environment. Larsen notes that while the Fed has continued supplying liquidity, it has increasingly concentrated its operations in shorter maturities rather than suppressing the long end of the curve.

He references the Fed’s reserve management purchases introduced in late 2025, which targeted shorter-dated liquidity provision without significantly lowering long-term term premia. In practice, Larsen believes this has allowed the yield curve to steepen more naturally while still keeping liquidity flowing through the system. As a result, he argues the private credit cycle remains robust even in the face of rising bond yields and geopolitical concerns.

Higher long-term yields not necessarily bearish for equities

This leads Larsen to challenge the widely accepted idea that higher long-term yields are automatically bearish for equities. He observes that the Nasdaq delivered strong performance both in 2024 and 2026 despite substantial increases in 10-year Treasury yields.

In previous years, investors often explained this resilience by pointing to the cash-rich balance sheets of large technology companies, which could benefit from higher interest income. However, Larsen argues that explanation is less convincing today due to the massive capital expenditure cycle currently underway among the major technology firms. Instead, he believes the more important factor is the strength of nominal growth and the continued expansion of private credit.

Is this time different?

According to Larsen, today’s environment differs significantly from the periods preceding the dot-com collapse and the Global Financial Crisis because there is no globally coordinated tightening cycle. In earlier episodes, central banks around the world were simultaneously raising rates aggressively.

By contrast, Larsen argues that policymakers today remain reluctant to tighten sharply despite recent inflation pressures. He notes that central banks can still derail the cycle if they raise short-term rates aggressively enough, but he does not yet see evidence of that happening. In his words, “we are still far from a 2022 hiking cycle.”

Does inflation no longer matter as much?

Larsen also downplays the significance of the recent inflation data. Although he acknowledges that the latest US CPI and PPI reports were “nasty,” he argues that inflation pressures remain heavily concentrated in food and energy. He claims that much of the recent increase in shelter inflation was due to technical distortions related to data collection issues during the government shutdown in October.

Once these distortions are stripped out, Larsen believes the underlying inflation trend looks far less concerning. As a result, he argues policymakers such as Kevin Warsh could reasonably characterise the current inflation spike as largely “transitory” and linked to the Strait of Hormuz energy shock rather than evidence of a broad inflation resurgence.

A new way of looking at higher yields

Ultimately, Larsen concludes that higher long-term bond yields are not necessarily a major threat to the broader credit cycle or to risk assets. In fact, he believes they may reinforce private credit creation by maintaining a steeper curve that benefits banks and financial intermediation.

While he accepts that bond market volatility can create short-term stress, he argues the overall macro backdrop remains supportive as long as private credit growth stays intact and central banks avoid aggressive tightening. He writes that these periodic surges in long-term yields may “only serve to solidify the credit cycle, not break it.”

However, Larsen makes clear that this does not mean he is bullish on long bonds themselves. Quite the opposite: he states directly that he has no interest in buying long-duration government bonds in the current environment.

Instead, he believes the role long bonds once played in diversified portfolios may now increasingly be filled by energy stocks. In his assessment, energy equities have become the new defensive asset class of the post-COVID macro regime because they tend to perform well precisely when inflation fears and geopolitical shocks pressure traditional fixed income assets.

Source: Andreas Steno Larsen, “Is the long-end of the curve a major worry? Not really... Here is why!”, Real Vision / NowcastIQ, written for clients on 18 May.​​