Treasury yields have climbed to levels that would normally weigh on stocks. But they haven't derailed the bull market.
Treasury yields near 5% haven't derailed the stock market despite a sharp bond sell-off.
An AI spending boom is helping keep stocks afloat as companies pour billions into infrastructure.
The bigger risk may be rising corporate borrowing, which could keep Fed rate hikes coming.
Late Thursday, the benchmark 10-year Treasury yield climbed to 4.97%, capping a monthslong bond sell-off fueled by higher oil prices, sticky inflation, heavy government borrowing, and expectations that the Federal Reserve will keep interest rates higher for longer.
The bond sell-off continued even after the Treasury tripled the size of one of its long-term bond buybacks.
Still, economists at TS Lombard don't think higher yields are enough to break the stock market.
"Rising yields are not yet an equity killer," Freya Beamish and Davide Oneglia wrote in a Wednesday note.
They argue the latest rise in yields isn't being driven by the kind of overheating economy that typically ends a bull market. Instead, they see it as a response to supply shocks and changes in the Treasury market.
One reason stocks have remained resilient is the AI spending boom. Beamish and Oneglia said companies are still pouring money into data centers and AI infrastructure, creating a cycle that keeps investment and demand growing.
"When tech companies are chasing the notion of infinite demand, it is quite hard to slow them down with a few basis points," they wrote.
The longer-term question is whether that investment spreads beyond the tech industry. Right now, much of that demand comes from within the tech industry itself.
If businesses outside the tech sector don't start spending more on AI, or if leading AI models lose their competitive edge, growth could eventually slow, even for hyperscalers.
The economists said investors should look beyond interest rates and pay closer attention to how much companies are borrowing.
"We'll be watching credit and leverage build-up, and it seems almost inevitable that this will eventually overshoot, particularly with this Fed," they wrote, adding that Fed Chair Kevin Warsh has shown a willingness to raise interest rates when necessary.
TS Lombard says there isn't a singular Treasury yield that would automatically trigger a stock-market sell-off.
But its economists argue the 10-year yield "should be at least 5%" in today's environment and warn that stocks will become harder to justify as bond yields stay high.
This article was written by Huileng Tan from Business Insider and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.