Equity allocation hits 56% as stocks shrug off rising Treasury yields

Equity allocation hit a three-year high of 56 percent even as Treasury yields climb, a divergence strategists say breaks near 5 percent.

"The current level is acceptable, but if the 10-year yield approaches 5 percent, it could rattle the market the way it did in 2023," said Liz Ann Sonders, chief investment strategist at Charles Schwab.

The Treasury's surprise buyback expansion on Wednesday offered temporary relief — the 10-year yield fell 6 basis points to 4.65 percent and the 30-year dropped 9 basis points to 5.19 percent — but yields rebounded Thursday. The 10-year now sits about 49 basis points above the 2-year, a curve shape Ned Davis Research data dating to 1976 shows has delivered average annualized S&P 500 returns of about 11 percent.

The stakes are high. Bank of America's global fund manager survey ranks disorderly bond-yield rises as the second-biggest threat to stocks after AI-bubble concerns, with 25 percent of respondents flagging a new inflation resurgence as the top risk. When the 10-year briefly touched 5 percent between July and October 2023, the S&P 500 fell 10 percent.

The buyback — which doubles the Treasury's per-operation ceiling to at least $4 billion for long-dated securities through Nov. 4 — was read by markets as a liquidity backstop rather than a policy shift. The 30-year yield had touched a 19-year high above 5.34 percent the prior session, and the 10-year reached its highest since 2007, as July inflation of 3.4 percent and a Federal Reserve split over its next move kept long-end pressure intact.

Yield curve shape, not level, may matter more

Some strategists argue the curve's shape matters more than its absolute level. Ed Clissold, chief U.S. strategist at Ned Davis Research, defines a "mild positive slope" — the 10-year up to 150 basis points above the 2-year — as the band where the S&P 500 has performed most consistently. With the spread near 49 basis points, the index sits inside that sweet spot, which has historically delivered average annualized returns of about 11 percent.

The 5 percent threshold

Even the bulls concede a ceiling exists. "Bond yields start to rise, and the stock market chooses to ignore it — until it can't," said Matt Maley, chief market strategist at Miller Tabak + Co. The 2023 episode offers the template: when the 10-year crossed 5 percent from late July to late October, the S&P 500 shed 10 percent.

The buyback's limits are also clear. Ross Pampelun, head of bond investments at Impax, told The Wall Street Journal that "$4 billion per session is negligible compared to the $31 trillion U.S. Treasury market." The program shifts the composition of debt — funding long-dated purchases with new short-term issuance — without shrinking total federal obligations.

With equity positioning at a three-year high and yields still near multi-year peaks, the market's resilience rests on a narrow assumption: that the 10-year stays below 5 percent. The Treasury's buyback runs only through Nov. 4, and the next quarterly refunding announcement will test whether the intervention holds. If yields resume their climb, the record equity allocation leaves little room for the drawdown that followed the 2023 breach.

This article is for informational purposes only and does not constitute investment advice.