Perhaps the biggest story in financial markets in 2026, so far at least, has been the surge in bond yields. Yields have been soaring in recent months, with the yield of the 10-year U.S. Treasury note rising more than 1 percentage point this year, from 4.17% in early January to 5.31% in early October, before settling back a bit in recent weeks. That yield level hasn’t been seen since 2002.
Such a surge in yields has often preceded a stock market correction, so many investors are understandably considering getting out of stocks now, before it’s too late. I think that’s a bad move, however, as investors who stay in the market through such episodes are more likely to thrive over time.
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And if we look more closely at the reasons for the recent surge in yields, there’s a case to be made that now is definitely not the time to abandon stocks.
First, however, what’s going on with bonds, and why is it dangerous to stocks?
Well, there are many different explanations for the surge in bond yields. Bond market analysts point to so-called bond vigilantes, i.e., bond investors who are selling their bonds in protest of soaring national deficits and weak central bank responses to persistently high inflation, which erodes bond values. Such a large selling volume sends bond prices down and yields, which move in the opposite direction, higher.
Other analysts say concerns about the war in the Persian Gulf and resulting high oil prices and inflation are scaring bond investors into selling.
Yields are surging due to an imbalance of the supply and demand for capital
My primary explanation for rising yields is a bit simpler: supply and demand. There has been a surge in global demand for capital this year, with national governments borrowing heavily in bond markets to fund rising deficit spending, while AI hyperscalers are issuing hundreds of billions of dollars in bonds to fund the build-out of AI data centers.
Yet the supply of global capital to purchase all those bonds is limited. Demand for capital is surging faster than its supply, driving the cost of capital — which for bonds is expressed in yields — higher.
And historically, soaring yields have been bad for stocks, for several reasons. Many other borrowing costs, from auto and home loans to corporate loans, are based on bond yields, so borrowing costs for consumers and businesses alike rise when yields do. That can depress consumer spending and push companies’ interest costs higher, squeezing corporate profits and earnings, which ultimately impacts share prices.
