SocGen strategist Albert Edwards says rising bond yields alone won't end the AI-driven stock rally, but they leave equities more exposed to bad news. He points to a Chinese slowdown, stretched earnings optimism, and heavy hedge-fund ownership of Treasurys as the pressure points that could turn a shock into an accident.
Rising yields raise the market's vulnerability
Société Générale global strategist Albert Edwards, well-known for his bearish views on markets, says surging bond yields won't by themselves end the artificial-intelligence-driven bull market in stocks. But in a note to clients dispatched Thursday, Edwards writes that the increase in term premium leaves equity investors, according to MarketWatch: "increasingly vulnerable to bad news such as a downturn in heady profits optimism."
Edwards ties the recent uptick in yields chiefly to the breakdown in U.S. negotiations with Iran over the Strait of Hormuz. He also cites the elevated U.S. budget deficit, a surge in AI capital spending crowding capital markets, and Fed governor Kevin Warsh's decision to limit forward guidance on policy.
Edwards has separately pointed to the rise in Japanese government bond yields, with the 10-year yield almost touching 3% last week, as the principal driver of the global bond-yield rise. So far, he observes, the AI-driven equity boom appears to be running under its own momentum, largely unshaken by these pressures.
China, earnings optimism, and Treasury plumbing as flashpoints
Edwards lays out where a shock could originate. First, an economic slowdown in China: ten-year Chinese bond yields dropped to a 13-month low of 1.69% this week as a housing crisis deepens. Second, peak earnings optimism — analyst optimism about earnings has only been this high once before outside a post-recession period, in 1987.
Third, Edwards flags what he calls fixed-income plumbing. Hedge funds now own 8.5% of all U.S. Treasury bonds, more than the combined holdings of Saudi Arabia, China, and Japan.
Unlike those sovereign holders, hedge funds are not long-term investors and often deploy heavy leverage, which can amplify price moves. Edwards points specifically to the basis trade, where funds buy Treasury bonds while shorting futures on those same bonds to exploit small pricing gaps between the two, as a particular area of weakness.
Source: MarketWatch
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