Barron's Streetwise - Will Bond Vigilantes Tank the Stock Market?

Episode Date: August 28, 2026

Although 5% would be a warning, the danger zone is higher, says top Wall Street researcher Jared Woodard. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

A lot of times those investment booms were to the greatest benefit of consumers or even businesses in the aggregate rather than investors. And if that history repeats once again in the next several years, it's going to be investors who truly are diversified across sources of risk and return that I think are going to be the ones who are most richly rewarded. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe and the voice you just heard is Jared Woodard. He's the head of the Research Investment Committee at Bank of America. He's going to be talking with us in a moment about rising bond yields and how high yields have to go before they tank the stock market. Jared has a specific number in mind. And he'll talk about whether that will happen.

Spoiler alert, he doesn't think so. Also, why 60-40 investing appears to be broken and what investors should do instead. That's a lot to get to. so I better hurry up and get my aimless rambling out of the way. Let's get into it. Listening in is our audio producer Emily Sumlin. Hi, Emily. Hi, Jack.

You have heard, I'm sure, probably just lately, the term bond vigilantes. Have you not? I have indeed. What comes to mind when I say vigilante? What kind of person do you picture? A good person or a bad person? A hero or a villain? Tragically misunderstood, but morally gray.

Okay. That's like, that's kind of a best case. scenario for the traditional usage of the word. Sometimes it's just an outright villain. Like Dexter from TV, you know, the serial killer who killed other serial killers, he was a vigilante. But you know, didn't you kind of come down on his side sometimes? But then you have outright villains like Two-Face, the Batman guy. I can't remember his exact story, but he was a bad guy, I remember from the movie. Or there's a lady who called the town on me a few years ago when I was cutting down a big tree because I didn't have a permit for it. Even though,

the tree was rotted in the middle. It was going to fall. I was only cutting it. I'm not going around clear cutting the trees. That's a vigilante. She's her and two-face I would put in the same camp. You're not the vigilante in that scenario? I was trying to save people from a falling tree.

I swear. Yeah. I think you were, unfortunately, the unauthorized tree cutter with a vigilante. For the good of the people, but still unsanctioned. I was the one with the chainsaw, and by me, I mean the people I hired to use the chainsaw. It wasn't even. You didn't even do it yourself. I don't do that kind of thing. Anyhow, where was it?

Oh, yes. To your point, Emily, rarely is vigilante used in just purely a happy light. There was a story earlier this year in the Montreal Gazette about a pothole vigilante. That was an area landscaper who was making overdue repairs on public roads in his spare time. Under threat of finer punishment, this man was putting his asphalt on the line. And I say that's a straight up hero. But that's a rare case. Anyhow, I bring up vigilante, of course, because we have all been hearing about bond vigilantes.

What's happened is that bond yields are rising. This year, the yield on the 10-year treasury is up a half point to 4.7%. That's a big move. The 30-year treasury has been rising, too. It recently went above 5.3%, the highest level in nearly two decades. Some people say this is the work of bond vigilantes. They're out there punishing spendthrift politicians over these runaway deficits. And that makes me wonder, could innocent stock investors like us be caught in the crossfire?

And if so, what level of bond yields is cause for panic? I raise this question because I often hear 5% on the 10-year treasury as that number. and we're pretty darn close now, 4.7%. There is some anecdotal evidence for the 5% theory. In the back half of 2023, the 10-year treasury yield climbed a full point to top 5% for the first time since 2007, and the stock market protested along the way. The S&P 500 that year fell 10.3% from its July high to its October low. That just barely met the commonly cited definition of a stock market correction.

Was it a difficult time for stock investors? Not really at all. They were still up more than 190% over the past decade. Coincidentally, there were two hit television shows known for what I guess I'll call wealth porn, Succession on HBO and Billions on Showtime. And they were airing their final seasons that year. It looked like foreshadowing. Were the rich going to have to forego the purchase of their third Pattec-Philippe watch?

It didn't happen, and thank goodness. The 10-year yield reversed and began falling almost immediately, and the S&P 500 shot over 15% higher between November and December, 2003. The lesson there, I guess, if you're looking only at that instance, would be maybe that 5% tipping point can tank the market for a while, but don't worry because it always bounces back, right? Hold on. Let me go back to the other stark example of the 10-year yield crossing the 5% mark. It was before I was born, all the way back in 1966. This is not going to be a full, old-timey history lesson.

There were some technical things going on with the bond market and bank savings at the time. But the president was Lyndon B. Johnson, and he was known for a program called Guns and Butter. That's a phrase that's sometimes used to talk about the trade-off between, funding a military buildup or social programs at home. Only in Johnson's case, it was both. There was the Vietnam War, and there was his great society programs to end poverty and improve education and so on. And he did it without raising taxes initially, and it triggered a lot of inflation.

I mentioned this period because it's an example of crossing that 5% threshold when there wasn't a happy ending. Inflation raged for more than a decade. bond yield soared. The 10-year Treasury yield eventually went to double-digit yields. It started a lost decade and a half for stock investors. Stock investors lost money between 1966 and 1981. And in 1981, I had been born and I was nine years old. I was not paying attention to the bond market at the time. But I'm sure I was noticing what was running on TV and I can tell you, it wasn't shows like succession and billions. And the TV shows back then,

Everybody seemed to be struggling. There was taxi about a bunch of cab drivers. Everybody seemed to have a second job to pick up extra money. On all in the family, Archie Bunker was always cranky and worried about losing his factory job. On one day at a time, there was a divorced single mother working to support two teenage daughters. And so on. The point here is that the market did not bounce right back and it was not okay. You will hear me in a moment mention these past stock market episodes and maybe one or two of the TV shows in a conversation with,

Jared Woodard at B of A. Two more quick things before we come to that. Number one, if government spending look like a problem back during Johnson's Guns and Butter era, what must it look like now? Back then, the annual federal deficit. By the way, I always like to point out to people because some people get confused by these words, the debt is the amount of money we owe. The deficit is the yearly amount by which we're going further into the hole. Sometimes I hear people use deficit when they really mean debt. So we're talking here about the deficit, the amount extra that we're going into the hole in a given year. Back in that era in the mid-1960s, that was ranging from a half percent to 1.8 percent of gross domestic product. Now we're closer to 6 percent. In other words, it's more than

three times the extra borrowing today, even as a percentage of the economy. What about the debt? back then it was about 40% of the economy. The national debt today is larger than the economy. You might have heard that the national debt just recently topped $40 trillion. I know trillion sounds like billion and it's hard to get your head around numbers that large. Take it from a certified multi-decade handler of stories about very large numbers. That is a very large number. One of the biggest differences between then and now is what the money is going towards.

Back then it was discretionary choices, the Vietnam War and the Great Society. You might have strong views on whether that spending was a good idea, but it was a choice. Today, a lot of the spending goes toward obligations that aren't as much of a choice, Social Security and Medicare and interests. My final point, that was my final point, Emily? Was it a 1980 show? It's probably Night Rider. These things usually lead to Night Rider. Was it Al's?

No, but that's a great reference. I know what it was. It was Goldman Sachs. Last year, Goldman Sachs did a study on just this matter, the matter of how high bond yields have to go to tank the stock market. Or more precisely, is 5% the number? And their conclusion was, not really. They put out a nifty chart of the relationship between the level of bond yields and stock returns since 1940.

And I mean, there's no real pattern there. There were times when returns were great and the 10 year yield was 2 to 3%. And there were times when returns were great and the 10 year yield was 6 to 7% or even over 8%. Their conclusion was it's not just about the level of yields. It's about how yields are moving and how quickly they're moving and why they're moving. And I think that's the end of my spiel. You can put your other earphone in now and turn the volume back up because we're going to get to the good stuff. To learn more about what level of bond yields might be dangerous for the stock market,

whether we're headed there, and how investors should be positioned now, I reached out to Jared Woodard. We've called on him before for hard-thinking stuff. He's the head of the Research Investment Committee at Bank of America. Let's hear part of that conversation now. You know, like a guy was saying to me the other day, I said, what do you think is the number that would really set the stock market to panic? He said, I think 5% on the 10-year treasury yield.

said, what? Like, we're not that far from 5% now. Like, that's all it would take. Let me ask you, is there, is there a magic number that you think that investors get really concerned about? What is, what is the history show? What do you think? I think five is your warning shot, and seven is the is the one that really hurts. Japan had a big run in the 1980s. Some people will recall. If you look at that episode, it was not quite seven. I think it was six point eight percent was the peak in Japanese government bond yields where the NICA, which had that epic run, kind of finally ended. They went a little higher. I think they went almost to eight in the rebounds, but it was the peak in the equity market was when, you know, Japanese government bonds got to

about seven in the dot-com era, which everyone has negative associations too, but remember everything that preceded that, the big productivity boom, which, with the expansion of, you know, computers into society. And that was great. Productivity was like five, six percent. Ten years. your treasury yields, I think we're also around seven. Maybe that was the six point eight jack. But the point is that you get to these big round numbers in which the yields are visibly higher than they had been recently in terms of the move, but also at the level starting to kick in the things they really move investor decisions. I mean, I think that the history or the how it's happened in the past is important, but even more important is the why. Like, why would high bond yields affect what

stock investors are doing. And those are the questions that we have been trying to answer and think about. And there's a few of them. We can go through them. But I think it's not just the level, but also what's happening in the market and the economy that makes that level become potentially a threat. If we, let's say that we move above 5% here sometime soon, how do we tell which one of those scenarios that we're in? Are we in the scenario where we might just go gently above 5% and come right back or are we in a scenario where we could be headed for a long and sort of difficult rise in bond yields? I think that the very big picture, multi-year story is really the most important one. And I'm glad you asked about that. Because our advice for investors, especially from an

asset allocation point of view and the work that I do with my team, is to help people think about when I've got capital and I want to put it to work, what's the best place in the whole universe of all asset classes, all regions, where should we take it? And the answer, at least since 2020, I mean, we've been writing about this topic since, I don't know, 2019, 2018, but the answer has definitely not been long-term government bonds. 20-plus-year treasury bond ETF is down 40% since the summer of COVID. Even if you were in the sort of seven to 10-year window, I think you're down more than 10% on a total return basis. It's been a terrible place to be. And I'm not that confident that long-term government bonds are going to be either the diversifier or the source of

protection and returns that they had been for a lot of people who have been investing in the last 20 years. I mean, you mentioned the 70s and 80s. That was painful for bond investors just as much as for stock investors. And it's been an economic era of globalization and ample capital and record low interest rates for decades. Look, this is ultimately for me, not to be grandiose, but I think the most important decision for investors right now is are we in the cusp of something really epic in a big way, in a positive way, in which countries around the world decide to reinvest in themselves again,

not just flee the sort of chaos or the scarce earnings growth or scarce economic growth for the U.S. dollar and the U.S. market all the time with their capital? Or do they take their capital and invest it at home and find good opportunities in which, yeah, you might have higher inflation but also higher growth? That's not the majority view. Jack. The majority view is, oh, if the dollar's weaker, it's because everything's terrible and

inflation is going to destroy us. It's going to be back to the grimy, gritty 70s. And that's not my view. But that's the view that so many investors have. And I understand it. Here's the point. Whether you think that we're on the cusp of much higher growth and a bit of inflation or higher inflation with no growth, the 6040 conventional asset allocation model that worked so well for the past 20 years would perform poorly in both scenarios. The thing that most people own, I think is very ill-suited

no matter whether you're bullish on growth, they're bearish on growth, but you think there's more inflation coming. It sounds like we need a new plan, and I want to ask you about that too. But you said 7% is the sort of danger zone for the 10-year treasury yield. So you don't see us... I mean, thank goodness we're not close to that now,

but you don't see us getting there anytime soon, I take it. No, because, look, When you think about the reasons why bond yields could hurt stocks, I don't think there's any obvious catalyst in the very near term that moves higher in yields would trigger. Like number one, on valuation, just in an absolute sense, if the price of a stock is the, you know, the discounted of cash flows, so future earnings, discounted back to the present.

Earnings are great, at least for a lot of companies, including small caps. And if the discount rate rises because bond yield rises and so the cost of capital goes up, yeah, the valuation would come down. all those stocks aren't cheap, at least in large cap, you know, market cap-weight indexes. They're not cheap by anyone's measure. They're also a bit higher quality than they've been in past decades. And if the discount rate goes up a bit, that's not a positive thing, but it's not a disaster as long as earnings are positive and those cash flows are actually coming in, you know,

quarter after quarter after quarter. Some tech stocks are very speculative with cash flows way out in the distance, you know, years and years from now, they might become profitable. but a lot of the companies at the top of the market today are also profitable today. And they've got profits rolling in, you know, today. And they're not kind of incrementally profitable. Like the difference of an extra percentage point on their funding rate isn't going to make or break, you know, the profits they're getting from these things they invest in. That's my understanding that they're more than clearing the hurdle.

Have I got that right? Exactly. So look, if the profit picture changes, that's a different story. And there's reasons to be thoughtful and careful about that. but it doesn't really have anything to do with the cost of capital for those companies. On a relative valuation basis, this is kind of the second way that bonds could hurt stocks, is if the yield available from bonds got so high that you said to yourself, well, why should I take the risk in the market if I can get something visibly safer,

you know, from government bonds? Here again, I don't find many investors who think that argument is so compelling today. I mentioned the bad returns in U.S. government bonds in recent years. consider that if inflation continues to run a little bit above what people are used to from the last couple decades on a trend basis where we're on the cycle whatever the Fed does I'm not talking about the month to month quarter quarter noise but on a year over year basis year for year if inflation in the very long term is structurally a little bit higher then increments to the higher bond yield isn't necessarily that attractive especially given the ability of of stocks to you know

benefit from that inflation in nominal terms as well so on both an absolute absolute value basis and relative value basis, higher bond yields can hurt stocks, but the levels where we see today and the behavior of bonds today, I think, doesn't suggest those are risks yet. The third catalyst, though, I think Jack is the one that people are thinking a little more about and we should be aware of, which is the economic effect of higher bond yields. If the cost of capital for companies goes up, then every company that's sensitive to those costs sees its margins get compressed and has a tougher road of it. Debt refinancing becomes harder. M&A becomes more expensive. Project financing is more challenging. You know, as well understood, so many

companies, especially the largest companies in the economy, are investing at a pace they've never done before. Higher cost of capital can become a pain point. And that's one worth watching in the future. Again, I don't think it's a point at which projects become uneconomical or M&A can't happen, not at all. But, but, you know, if the Fed were to hike a bunch, if yields, you know, in the back end of the curve, continued to rise. And if policymakers did nothing about it, which they're not, then, yeah, you could have an economic concern. Again, we don't see data suggesting that's a near-term risk, but it's something to watch as the trend moves. Thank you, Jared. Let's take a quick break. Welcome back with more of my conversation with

Jared Wooder to B of A. Welcome back. Emily, if you decided to go into a very much, a life of crime, and if you only had a name to go on, the Bond Vigilante, what do you think you would be known for? What would you do? This isn't accurate, Jack, but all I can really think about is the hamburger. I think I would look and live like him. I think it's perfect. You put a bee on his chest. You've got everything you need. Would you be grimace? I practically have grimmis. And we don't know exactly how the hamburger attacks people, but that's part of the terror, that's not knowing. All right, I'm glad we got that out of the way. Let's get back now to my conversation with Jared at B of A. You don't want to add your own interpretation? No,

the hamburger? Not the hamburger. But like, whatever kind of vigilante you would be. If I were the bond vigilante? No, I think it's perfect. I know, you can't be the hamburgler. I'm I'm the hamburger way. I think it's perfect. We'll have to workshop this crime spree idea more off air for right now. Let's get back to my conversation with Jared at B of A. If these budget deficits are playing any role in sending bond yields higher, and as bond yields go higher, it becomes more expensive to finance the debt.

It's just the problem kind of makes itself worse. Is that a concern too? It is a concern. I think one thing that goes underappreciated sometimes in conversations about budget deficits is that it does matter what you spend the money on. For a few decades, we've been not just the United States, but many countries have been spending a whole lot of money on basically consumption, healthcare and education and other things that I'm not saying they're bad things, but all the time you need to do them. But if you do them poorly, you're not increasing the prospect for future growth. Many of the deficits we see around the world today, and it's by no means of isolated the United States,

come from financing for projects that actually could raise productivity and economic growth. Famously, some of the best technology in the world had its early life in defense spending in the United States, or at least defense-related research that then got commercialized into the public market. Same thing with medicine and early patents on, you know, new drugs and so on. so on. So when you have governments and people basically around the world saying we're going to

invest in ourselves in industrial capacity and new technology and in resource security, yeah, that can mean higher costs up front. It often does. But the work from, you know, the Bank of America Research Department now going on 10 years has been to say this can also raise prospects for higher economic growth. Okay, this is good. What I hear you saying so far is that I can continue to be long-term optimistic. I don't have to sell everything. and put it in canned goods and Pokemon cards or some other non-traditional asset or what have you. But I do have to figure out new answers for, you know, if people are saying, what do I do with my money? And I'm saying, hey, you put some in stocks and you put some in bonds.

That's what people have done all along. You do the 60-40 or whatever your mixes. You're saying, I should think about some alternatives to that because the 60-40 hasn't been working, namely the 40 has been a problem. So what should I be doing instead? What are some other ideas that I can do about that? If you want fixed income, the great news is there are many places to go in a fixed income universe where you can get meaningful yield, uncorrelated returns without having to go into very long-term debt,

especially long-term debt of governments, which may or may not do what you'd like them to do. This has been a big feature of our work. We call it prudent yield. And the point is to flag sectors of the fixed income universe that are underrepresented in most benchmarks and indexes in portfolios, things like emerging market debt, which most people don't know represents a quarter of all the fixed income securities in the world, but is basically zero in most people's allocations. High yield and fallen angel corporate bonds, which by our analysis have given you the best returns in the U.S. corporate bond market, again. Dig into that a little bit. Tell us what is a fallen angel. I like the sound of that. I've seen

some ETFs out there that have that in the name. What's a fallen angel? and why should I like it? These are bonds that used to be rated as investment grade. The company had whatever problems or challenges, got downgraded to high yield, and so is ineligible to be owned by, you know, investment professionals who have an investment grade mandate. So they've fallen just below the threshold.

Typically, when that happens, companies will do whatever they need to do to become in the jargon rising stars and eligible for an upgrade again. When they get upgraded, as you can imagine, the money available to them, you know, rushes back in and the price of those bonds rises accordingly. So there's a big drop, but when you move from one world to the other, investment grade, the lowest part of it is triple B. And when you take just one tick below that, you go into the what we call the junk bond world or the high yield world or whatever you want to call it.

But even though you've just taken one tick lower, there's a big change in your bond yields. Have I got that right? A big change in your yield because of who can own you. Right. And so as you cross that threshold, you know, first falling and then hopefully before too long, rising again, the returns to owning those bonds. Once they've fallen and as they rise, by our analysis has given you the best risk-adjusted return in the U.S. corporate bond market over many decades. You're better off being in that highest part of the high-yield market than going even further down in credit quality where you can get. higher yields, you're saying you're better off being in that highest quality part of the lower

half, or of the high yield bond market. The best house in the bad neighborhood, so to speak. Right, right. Yeah. And by the way, those triple C, you know, you can see eye-popping, you know, levels of yields and some of those are bonds. History shows, though, given the higher default rates, it's not worth, it's not worth going, you know, going quite that far.

Emerging market debt, high yield fallen angels, senior lows, senior lows, see your know CLO, ETS, which sound complex we can talk about maybe so their time jack. Point is, you know, two ideas for the 40. Number one, parts of fixed income that most people don't own that are uncorrelated and offer really meaningful sources of return separate from what the government's doing. Number two, real assets. You can think about commodities here. There's other things to do as well.

The products vary whether you own futures or ETFs or private sector, you know, private assets or whatever you want to do. There's lots of options out there. I was surprised by you put you put out a chart or some kind of some kind of stats that I saw and it compared a portfolio of stocks and commodities with a portfolio of stocks and bonds. And I mean, I think a commodities is stuff that just sits there and bonds pay you a yield. So I would guess that the thing that's paying you a yield would do much better. But it looked like the commodities have done pretty darn well, you know, using them as an as an alternate hedge instead of the bonds you've been using. Do I have that right?

That's right. In fact, if you, and this is just a thought experiment, I'm not sure everyone should go out and do this tomorrow, but if you were to replace the 40% of your portfolio, take out a little fixed income away and make 40% of that commodities. So you're still 60, 40, but now it's with commodities. Over the past many decades, you would have averaged an extra percentage point of return every year

than what you would have had doing it with bonds. You multiply that over investment career. You're talking about very, very real money. By the way, that's with commodity index. that are pretty static in what they own. As you say, a lot of times they do just sit there, and then there'll be a breakout in gold or oil or soybeans or whatever it is. A lot of the recent products and research that we cover in our ETF work shows

that there's some indexes and some funds that track them that are much more dynamic, so you're not owning things that just sit there, but the things that are really moving the way you want. So there's even better potential for returns and also diversification. This has been very helpful. I know everybody wants to talk to you right now. I don't want to keep you longer than I have to. Is there anything that I have neglected to ask you about anything else that investors ought to be looking at to buy right now or anything else that investors should be thinking about on the subject of rising yields or concerned about or elated about?

What haven't I asked you about that I should have? Look, the earnings look great. Our analysts are incredibly bullish. And who am I to say that, you know, the entire world is wrong? I would say that this summer we noticed a pretty marked shift in allocations and returns into things that are a little more defensive. in some cases or are cyclical and risky but have nothing to do with artificial intelligence, things like regional banks or, I don't know, insurance or pharmaceutical, especially biotech. There's places to go where you can get returns, either that let you be a little more cautious

if you had a good year and you don't want to put it all at risk, or you think that there's places in the market where you'd like to seek upside but without hoping that all of it's going to come from AI and all the beneficiaries and derivatives of that. I think that's actually a good approach to take at a time when CAPEX investments relative to revenues are at record highs, when the productivity data isn't quite supportive yet at the aggregate level as you might like it to be,

and it might take longer for those gains to come through. I'm not saying artificial intelligence isn't real or can't enhance productivity, but history is full of examples of new technologies that actually raise productivity at the national level in a meaningful way, but where the gains didn't necessarily accrue entirely to the providers of capital, you know, to the investors. I think about railroads or fiber optic cable or shale or even electricity in cities.

They all made us more productive. A lot of times those investment booms were to the greatest benefit of consumers or even businesses in the aggregate rather than investors. And if that history repeats once again in the next several years, it's going to be investors who truly are diversified across sources of risk and return, not putting it all into one sort of mega trade that I think are going to be the ones who are most richly rewarded. Got it. Jared, always great speaking with you. Enjoy these last few days of summer and I'll talk with you down the road.

Thank you. Thanks, Jack. Thank you, Jared. Anyone else we have to thank, Emily? Louis De Palma and Reverend Jim from Taxi, the whole gang. And the hamburger. That's right. And thanks to all of you for listening.

If you have a question about investing you'd like answered, go ahead and send it in. It could be in a future episode. Just tape it on the voice memo app on your phone. Jack.how at Barron's.com. If you listen on Apple, Spotify, YouTube, you can, what do you do? You subscribe, you like, you smash the smash button or something or other. And you can write us a review. And if you were the bond vigilante, what sort of life of mayhem would you leave?

Indeed. No McDonald's characters are all taken. Thanks and see you next week.