Global fund managers have allocated 56% of their portfolios to equities, marking the highest proportion since November 2021, according to Bank of America Corp's latest survey. This bullish stance toward stocks comes despite the same survey identifying a 'disorderly rise in bond yields' as the second-largest threat to equity markets after AI bubble concerns. Additionally, 25% of respondents cited a second wave of inflation as the largest risk factor, as reported by The Economic Times.
The bond market's alarm bells intensified through the summer, prompting the Trump administration to announce significant action on Wednesday. The U.S. Treasury Department announced it will more than double the amount of U.S. government bonds it will buy back, with the move working to calm longer-term yields. Treasury Secretary Scott Bessent confirmed the program will double the pace of bond buybacks to $4 billion at a time, beginning September 9 and running until the day after the midterm elections in November. This move sent bond prices surging and yields lower, but the 10-year Treasury yield remains around 4.7%, close to where it began yesterday and within the same general uptrend of the summer. The 30-year yield is trading around 5.2%, only slightly below yesterday's highs and still within the summer's upward trend, as reported by The Economic Times.
The slumping bond market is sending yields sharply higher, with the U.S. now paying $3 billion in interest per day, making it the government's second-biggest expense after Social Security. Rising bond yields are reverberating across the economy, with the average 30-year mortgage rate hitting 6.67% last week, nearly the highest level in a year, according to Freddie Mac. This represents a significant increase from the average 30-year mortgage rate of 6.8% previously reported, demonstrating how quickly rising bond yields are impacting consumer borrowing costs. The yield increases are also pushing up interest rates on credit cards, car loans, and all kinds of borrowing costs across the economy, as reported by The Economic Times.
Despite rising borrowing costs, companies are making decent profits, signaling that the economy may be doing well nonetheless. Bond investors and stock investors tend to see things differently, with bond investors primarily concerned about getting paid back while stock investors make straight-up bets on corporate profits. This divergence is evident in the current market dynamics, where bond investors demand higher interest rates when worried about government debt levels and inflation, while stock investors continue to allocate record amounts to equities. The 10-year yields are about 49 basis points higher than two-year yields, creating what analysts describe as a modestly upward sloping yield curve that historically provides significant gains for the S&P 500 with an average annual return of roughly 11% according to Ned Davis Research analysis going back to 1976.
The bond market is facing unprecedented pressure from the AI investment boom, with global tech companies expected to spend more than $730 billion this year, primarily on AI. Major tech companies including Amazon, Alphabet, Meta, and Oracle issued about $194 billion of bonds through early July—79% higher than all of 2025. This flood of new debt is creating competition for investors' money and requiring borrowers to offer higher yields, contributing to elevated long-term borrowing costs even as expectations for Fed policy have shifted, as reported by The Economic Times.
