30-year US bonds above 5.3%. A warning for stocks?

The yield on 30-year US government bonds rose today to around 5.3%, the highest since 2007.

At first glance, that may look bad. But the mere similarity of yields doesn't mean a financial crisis awaits. It's far more important to understand why yields are rising and what that means for stocks.

Why are bonds falling?

The current rise in yields isn't primarily about the market expecting more aggressive Fed rate hikes. The 2-year Treasury is around 4.18%, while the 30-year has exceeded 5.3%. So the spread is more than one percentage point. The market is demanding higher compensation for risks decades away.

The main reasons right now are:

-higher inflation risk, supported by oil above $90,

-concerns about US deficits and further growth in government debt,

-a large supply of new bonds,

-geopolitical uncertainty around the US-Iran conflict.

In other words, investors don't want to hold long-term US debt at 4%. They want more than 5% for it.

And one big problem arises for stocks. According to FactSet, the S&P 500 trades at about 20 times expected earnings, so its forward earnings yield is about 5%. Meanwhile, the 30-year US bond offers around 5.3%.

That doesn't mean the bond is automatically better than the S&P 500. Company earnings can grow, dividends can increase, and stocks have significantly higher long-term upside. Moreover, the Treasury is not risk-free in real terms – there is still inflation risk and, if sold before maturity, significant interest rate risk.

But today an investor gets a very decent alternative to stocks without taking on corporate risk.

And for technology and growth companies, this difference is even more pronounced. The Nasdaq 100 has a forward P/E of about 25.9, which corresponds to an earnings yield of only about 3.9%. That's why expensive growth and AI stocks are most sensitive to rising bond yields.

Their valuation relies heavily on earnings that are far in the future. The higher the discount rate an investor uses, the lower the value of those future cash flows today.

But that doesn't mean an immediate crash. The fact that the 30-year yield hasn't been this high since 2007 is an interesting historical comparison, not a predictive indicator of a financial crisis. For a more significant bear market, I would need to see a combination of other problems – for example, a sharp deterioration in corporate earnings, a recession, widening credit spreads, or problems in the financial system.

This rather means that the margin for error in expensive stocks is shrinking significantly.

But I'm certainly not selling my quality companies because of this.

However, when making new purchases, I'm much stricter on valuation, and for companies where perfect growth for the next 5-10 years is priced in, I expect higher volatility. If higher yields cause a more significant contraction in valuations while the fundamentals of specific companies remain unchanged, in my view that could be a nice opportunity for a long-term investor.