“If we see the yield climbing toward 6%, there is a danger of a correction of up to 20%”
Rising U.S. Treasury yields are putting pressure on an equity market that has surged on expectations of continued AI-driven growth. Investors are increasingly watching whether higher borrowing costs, inflation and record debt issuance could finally force a sharp reversal in stocks.
The U.S. bond market has been sending a warning signal to investors in recent weeks. Yields on 10-year and 30-year U.S. government bonds have climbed to 4.8% and 5.25%, respectively, while expectations for rapid interest rate cuts have once again been pushed back, with the market already pricing in the possibility of a U.S. rate hike.
In general, when government bond yields rise, they offer investors a more attractive alternative to stocks while simultaneously increasing companies’ financing costs. Both dynamics work against demand for equities. A sharp rise in yields is therefore a warning sign for investors betting that the stock market can continue its rally.
So far, however, investors appear largely indifferent, and U.S. stock indexes continue to climb. The S&P 500 has risen 12.75% since the beginning of the year, while the Nasdaq 100, which is heavily weighted toward technology stocks, has gained 17%.
The gains in equities appear to be masking the threat posed by bonds. History shows that when corrections eventually hit stock markets, they can come quickly, with warning signs often appearing first in the bond market.
Israeli savers are also exposed to this tension. Direct exposure among some institutional investors to overseas equities, particularly U.S. stocks, has become very high in recent years, reaching 70% at some institutions. If rising yields eventually translate into a correction in global stock markets, the impact on Israeli pension funds, provident funds and education funds could therefore be far greater than the direct losses on their bond holdings.
The rise in U.S. government bond yields is being driven by several forces working against bond prices. First, U.S. inflation is not converging toward the Federal Reserve’s target as quickly as investors had hoped, leaving the central bank in no rush to continue cutting interest rates. The federal funds rate currently stands at 3.5%-3.75%.
Second, the U.S. government needs to raise enormous sums to finance its budget deficit and growing public debt. A large supply of government bonds can require higher yields to attract buyers. At the same time, a wave of corporate debt issuance is being driven by companies seeking to finance the enormous investment required for the artificial intelligence boom.
Lior Yochpaz, chief investment officer at Menora Mivtachim, says the decline in bond prices and corresponding rise in yields also reflects the growing supply of bonds issued by technology giants. These companies need to invest huge amounts of capital in data centers, computing infrastructure and development, increasing their financing needs and creating an alternative source of debt supply alongside government bonds.
At the same time, foreign countries and investors are reducing their dependence on the U.S. market, further weighing on demand.
“We are in a high-interest-rate environment, and the market expected interest rate declines because inflation was supposed to converge,” Yochpaz said. “When inflation does not fall, interest rates do not fall, or they may even rise. The fundamental change is not just inflation and interest-rate pricing, but a major shift in supply and demand. Less demand for U.S. government bonds, alongside the huge investments in AI that require debt, is increasing the supply of debt in the world.”
In the past, institutional investors turned to government bonds, Yochpaz said. Today, they are increasingly turning to infrastructure investments such as electricity, energy and data centers, creating another major channel for capital.
Yochpaz does not believe investors should make a sharp change in their equity allocations at this stage. Alongside high interest rates, he sees significant potential for economic growth and investment in AI that could ultimately increase corporate profits. But other investment managers are considerably more cautious.
Yuval Beer Even, portfolio manager for members’ investments at Migdal Insurance, describes the U.S. bond market as a “boiling cauldron.”
“The cauldron is made up of several components that make it boiling: a warming economy, a high supply of funding, and inflation that is rising under the auspices of AI,” he said.
According to Beer Even, companies such as Google, Amazon and Microsoft are investing enormous sums in data centers, purchasing chips and expanding electricity infrastructure, with some of the financing coming from the debt market.
“This year, the volume of debt issuance will break an all-time record under the auspices of companies like Google, Amazon and Microsoft,” he said. “Simply because someone has to pay for all the chips and build the data centers.”
Migdal has responded by shortening the duration of its overseas bond portfolio and reducing its exposure to foreign real estate. It has also become more cautious toward highly leveraged companies, since shorter-duration bonds are less sensitive to changes in interest rates.
The energy market is adding another source of inflationary pressure. Itay Lipkovitz, CEO of Horizon Capital Markets, points to oil and gas prices, restrictions on movement through the Strait of Hormuz and tensions with Iran as factors that could reignite inflation.
When energy becomes more expensive, the increase filters through to production, transportation and electricity costs, making it more difficult for the Federal Reserve to cut interest rates. At the same time, the enormous size of U.S. government debt means that every increase in yields makes borrowing more expensive for Washington.
The imposition of tariffs on imports from neighboring Canada is another potential source of inflationary pressure.
The tension is particularly pronounced in the AI sector, where some of the companies attracting the most investor attention are simultaneously driving both sides of the equation. On the one hand, massive investments in computing infrastructure are supporting growth at chip and technology companies. On the other, those same investments are increasing demand for capital and pushing up financing costs.
“As the financing costs of data centers rise, the demand for chips will fall,” Beer Even said. He also warned that rising chip prices could create a broader inflationary effect, affecting everything from computers and smartphones to consumer services.
Lior Alagem, director of securities research at Discount Bank, notes that the bond market tends to move ahead of the stock market.
“The bond market often gives some kind of signal. It has a very big impact on the other avenues in investment portfolios, especially the equity component,” he said.
Beer Even points to 5.5% on the 10-year Treasury yield as a potential threshold.
“If we see the 10-year bond reach a yield to maturity of 5.5%, the stock market will already be in a different place,” he said. “The market will not be able to remain indifferent to this and there will be a very sharp sell-off.”
Lipkovitz is already watching the numbers closely.
“Already today, since July, some of the chip stocks and stocks with high multiples have entered a correction,” he said. “If we see the 5.2% yield fail to hold and start climbing toward 6%, there is a danger of a much larger sell-off in high-multiple stocks, potentially a correction of 15% or 20%.”
Even if there is no broad decline in equities, however, the impact of rising yields will not be uniform across the stock market.
Conversations with investment managers indicate that some sectors are particularly vulnerable. Income-producing real estate companies, REITs, infrastructure companies and highly leveraged businesses are sensitive to rising yields because they must refinance large amounts of debt. Dividend-paying stocks also become relatively less attractive when government bonds offer higher yields.
Banks and other financial companies, on the other hand, can benefit from wider interest-rate spreads, provided that higher yields do not develop into a broader credit crisis.
Alagem identifies another potentially vulnerable sector: defense companies. Because defense contractors depend heavily on government contracts, he argues, rising government borrowing costs could make governments less inclined to quickly commit to new spending programs.
Saar Weintraub, deputy CIO at Altshuler Shaham, does not recommend completely exiting the stock market. Instead, he believes investors should begin balancing their portfolios and increase their allocation to government bonds, which now offer significantly more attractive yields than they did in the past.
“One of the things that stands out in all the laws of the old, conventional economy is the clear connection to the stock market: as bond yields rise, the stock market is exposed to more risks and must suffer,” Weintraub said. “Where will this happen? It’s hard to know.
“One of the reasons the yield keeps rising is that the stock market is performing so well. People are not willing to settle for bond yields, but they need to start being more cautious. Some people are already 100% in stocks and are even leveraged beyond that, because everyone loves the juicy returns of the stock market.
“However, the average rate of return is supposed to moderate, and therefore it is necessary to start treating bond yields and their role as an alternative investment with more respect.”
Weintraub argues that even a long-term government bond yielding 5.3% deserves consideration. “I don’t think that if I were to suggest to a young investor that he could double his money in 20 years, it would sound attractive to him,” he said. “So there is still room for exposure to the stock market. But the change will happen with the momentum of the stock market.
“The relentless increases in the stock market, such as the Tel Aviv-125 index, which rose 55% in the past year, are not sustainable over time, and therefore extreme caution is required. Everyone knows this, but they still prefer to take the risk, at least in the short term.”
Aviel Azuelos, director of the investment department at Profound Investment House, takes a different view and does not recommend investing in U.S. government bonds at this stage.
“Rising yields on government bonds in the U.S. affect the markets, but the large companies, including the AI giants, are relatively established. They are raising debt to build future infrastructure that will lead to growth,” he said.
“In Israel, the real interest rate is higher, and the fear of further increases is lower compared with the U.S. At a time like this, caution is required: do not extend duration beyond what is desired and be careful to diversify broadly across stable sectors such as banks and insurance.
“For an Israeli investor, hedging costs may neutralize the yield advantage of dollar-denominated bonds, and therefore the Israeli debt portfolio continues to offer a worthwhile and solid alternative.”
Israel Attia, CEO of the Center for Financial Planning, attributes part of the decline in demand for bonds to the reduced allocation to fixed income among pension funds.
“A study by the Bank for International Settlements, known as the BIS, published in June 2026, reveals a structural change in the way pension funds are managed around the world,” he said. “Over the years, there has been a decrease in the weight of government and corporate bonds, alongside an increase in alternative investments, investment funds, private assets and real estate.
“The significance is not only for those saving for retirement. This is a change that may affect asset prices and the cost of debt for governments and companies.
“The most striking figure in the report is the sharp decline in the weight of bonds in pension portfolios. In the United States, pension funds held more than 35% of their assets in bonds in the early 1980s. In recent years, that rate has already fallen to less than 15%. At the same time, investment in mutual funds and collective investment vehicles has jumped from almost zero to about 30% of the portfolio.”
