Nouriel Roubini argues that in the US at least, rising yields partly reflect credit demand and potential future growth

A sharp rise in bond yields across key economies like the United States, Japan, Germany, the United Kingdom, and France has raised new concerns about the fiscal and financial risks that lay ahead. A common view is that this bond “rout” could augur severe disruptions to economic growth and pain for US and global stock markets.

But while it is true that yields have risen to levels unseen in almost two decades, the relationship between bond yields, economic growth, and stock markets is more complex than this naive view implies. After all, the recent rise in yields could reflect any number of different and contradictory factors.

Consider some of the obvious ones. First, higher inflation stemming from supply shocks—renewed protectionism and war-driven disruptions to the flow of oil—could push nominal yields higher and be stagflationary: reducing growth, increasing inflation, and pushing down equity prices.

Second, unsustainable fiscal deficits could lead to higher yields if markets expect that central banks will step in to monetise them, thus causing higher inflation. Alternatively, if the deficits aren’t likely to be monetised, the higher yields could be driven by a rise of sovereign-risk premia, which could cause a public-debt crisis or crowd out private-sector spending and growth. In these cases, unsustainable fiscal policy does lead to lower growth, possibly higher inflation, and higher yields that hurt stock markets.

But then there is the third factor: a private-sector investment boom driven by capital expenditures (capex) on AI, which is pushing up nominal yields because it fuels higher demand for credit, rather than foreshadowing higher inflation expectations. In this case, higher bond yields are a signal of stronger future growth, which bodes well for stock prices.

This last factor has been a major driver of bond yields and stock markets for the last few years. Since the launch of ChatGPT in 2022, bond yields have gone higher—from a bottom of 1% in the US during the COVID-19 crisis to current levels around or above 5%—as US equities (and some global ones) chalked up double-digit returns. Even until mid-August, the rise in US bond yields coincided with new all-time highs for the main US stock index, the S&P 500.

This is what one would expect. When growth is strong and risk is on, equities do well and bond yields tend to rise; equally, when the appetite for risk is low and the economy is in recession, equities do poorly and bond yields fall. That is why lower bond yields are usually a sign of economic weakness, which in turn implies weakness for stock markets.

Of course, this positive correlation between bond yields and stock returns can turn negative—with bond yields rising as equity prices fall—when inflationary shocks lead to tighter monetary policy, or when there are serious concerns about fiscal sustainability. That is what happened in 2022, when surging deficits and the post-COVID inflation led to a sharp rise in bond yields and a bear market for US and global equities. And something similar occurred following US President Donald Trump’s April 2, 2025, “Liberation Day” tariff announcement, and again during the oil shock triggered by this year’s war with Iran, as well as with the most recent global bond rout, partly led by another spike in oil prices and fiscal concerns.

Whenever a correction in equities is led by bond yields, long-duration assets like tech stocks (whose dividend streams are further in the future) tend to react more to a rise in long-term bond yields than is the case with shorter-duration assets (like the equities of more mature firms). Hence, during the bond rout of 2022, the S&P 500 fell by about 15%, while the tech-heavy Nasdaq fell more than 20%, with many individual tech and growth stocks falling by more than 30%. And during this month’s bond rout, the sharp rise in global yields hurt tech stocks more than the other broader market indices.

But given the positive outlook for growth in tech-led sectors, the returns to tech firms have been higher than traditional equities for the last five years, despite higher bond yields. One therefore should assume that in high-innovation countries like the US, the recent rise in bond yields is mostly driven by the rise in real yields rather than by an increase in inflation expectations, which remain well anchored slightly above 2%.

Again, a rise in real yields is what one would expect, given tech firms’ and hyperscalers’ massive borrowing to finance data-center construction and other investments. While the US fiscal deficit is high, it has plateaued near 6% of GDP and is likely to fall in the next few years, owing to higher potential growth and some additional tariff revenues.

I am not trying to be Panglossian about the US fiscal outlook, which certainly requires serious austerity and entitlement reforms over the next few years. But I would point out that a US economy with higher potential growth—if new technologies increase potential output growth from 2% to 3% or more—has a better medium-term fiscal outlook than the likes of Japan or the eurozone, which are stuck with a potential growth rate of 1.2% for the eurozone and even lower for Japan.

So, both the secular and recent rise in global bond yields largely reflect structural factors like the end of the post-2008 Great Stagnation, higher potential growth and investment, and higher real yields. These are all positives for US and (some) global equities. Of course, in advanced economies that are stagnating and not innovating as much as the US, concerns about large fiscal deficits, public-debt accumulation, and future central-bank monetisation are justified, as are fears of large negative aggregate supply shocks. Here, too, higher bond yields are exactly what one should expect.

*Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business. Copyright: Project Syndicate, 2026, published here with permission.