Bond Market Analysis: Are Rising Long-Term Yields No Longer a Threat to Equities?
Author: Axel Rudolph, Market Analyst
Publication Date: Thursday, 21 May 2026
Overview
The article discusses the evolving relationship between bond yields and equity markets in the post-COVID era. Traditionally, rising long-term bond yields have been viewed as detrimental to stock markets due to increased borrowing costs and reduced present value of future earnings. However, some analysts, including Andreas Steno Larsen, argue that this relationship may no longer hold true.
Changing Perspectives on Bond Yields
Larsen suggests that the historical frameworks used to analyze bond yields were developed during a long bull market in bonds, which may not apply in the current environment characterized by fiscal expansion and higher inflation volatility. He posits that rising long-term yields could actually support risk assets rather than threaten them.
Yield Curve and Recession Signals
Historically, a steepening yield curve after inversion has signaled impending economic downturns. However, after the inflation shock of 2022, the yield curve steepened without leading to the expected recession. This disconnect may indicate a fundamental shift in the macroeconomic regime, suggesting that higher long-term yields could be beneficial for certain financial sectors.
Impact on Banking and Credit Creation
Larsen emphasizes that a steeper yield curve enhances banks' profitability by improving their ability to lend long-term while borrowing short-term. He argues that the normalization of the yield curve post-COVID could restore healthier credit creation incentives, contrasting with the previous era of quantitative easing that flattened the curve.
Case Study: Japan
The article references Japan's experience under the Bank of Japan's yield curve control policy, where suppressed yields limited banking profitability. As the BoJ loosened its grip, the yield curve steepened, leading to a revival in private credit and strong equity performance, illustrating that rising yields can coexist with healthy market conditions.
Private Credit Creation vs. Long-Term Yields
Larsen argues that private credit creation has become more significant than long-term bond yields in driving economic activity. He notes a shift in the relationship between the yield curve and real-economy indicators, suggesting that the private sector is now the main engine of credit creation, reducing reliance on central bank interventions.
Current Economic Environment
Unlike previous tightening cycles, there is currently no globally coordinated effort to raise rates aggressively. Larsen believes that while inflation pressures exist, they are concentrated in specific sectors and may not indicate a broader inflation resurgence. He suggests that the current inflation spike could be transitory.
Conclusion
Larsen concludes that rising long-term bond yields do not necessarily pose a threat to equities or the credit cycle. Instead, they may reinforce private credit creation and support financial intermediation. He cautions against viewing long bonds as a safe investment in the current environment, suggesting that energy stocks may now serve as a more defensive asset class.
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.