The obsession with specific yield levels—whether 4% or 5%—is misplaced. It’s not where yields are, but how fast they move that unsettles equity markets. Historical evidence shows that yield volatility, not the absolute level, is the real culprit behind market instability. With U.S. 10-year yield volatility now returning to its long-term average, we expect greater stability in stock market returns, barring new macro shocks.

High Yields Don’t Kill Stocks, Wild Swings Do

Key Trends: Debunking the Yield Level Myth

• Historical Data Dismantles the 5% Yield Panic The S&P500 has delivered strong returns even in periods of high yields, as long as yields were stable. For instance, equity markets in the 1990s thrived despite 10-year Treasury yields averaging over 6%. Conversely, sharp spikes in yields—regardless of their starting point—have historically coincided with stock market volatility.

• Volatility: The True Market Villain Since 2020, the rolling 20-day standard deviation of U.S. 10-year yields has surged well above historical norms, creating a turbulent backdrop for equities. However, recent months have seen a reversion to long-term averages, a trend that has historically supported market stability.

• Yield Volatility and Stock Market Volatility Go Hand in Hand The relationship between bond yield volatility and the VIX is clear: when yields swing wildly, fear and uncertainty dominate equity markets. Stability in yields reduces this noise, allowing fundamentals to drive stock performance.