‘Slow-Motion Crisis’ in Bonds Will Break Stocks. Listen to the Dean of Perma-Bears.

The scene on the floor of the New York Stock Exchange last week. (Timothy A. Clary / AFP / Getty Images))

A reality check for stock investors is coming from the bond market, according to Albert Edwards, the Société Générale strategist who could be called the dean of perma-bears for his pessimistic research.

Yields on longer-term U.S. government bonds have largely stayed put this month, but they have gone steadily higher since the Federal Reserve cut short-term rates nearly to zero to prop up the economy during the pandemic. Since the lows of 2020, the 30-year Treasury yield has climbed 3.994 percentage points while the 10-year Treasury yield is up 3.831 points. In the past 41 years, yields have never risen this much over a similar span, according to the Dow Jones Market Data team.

Created with Highcharts 9.0.1Treasury yieldsSource: Tullett Prebon

Created with Highcharts 9.0.12021'2500.51.01.52.02.53.03.54.04.55.05.5%30-year bond10-year note

One problem with higher rates on longer-term bonds is that they make it more expensive for the government to borrow. The U.S. has 70% of its outstanding Treasury debt in longer-dated securities.

This comes as the Treasury Department is expected to have to borrow increasing amounts as a result of President Donald Trump’s tax-and-spending bill, which is expected to increase the gap between spending and government revenue.

The growing debt burden will make it harder for the government to keep providing the fiscal stimulus that has contributed to the postpandemic economic recovery and thus the continuing boom in stocks. Despite this backdrop, the S&P 500 has finished the day at a record high 18 times this year.

“Sorry to be a killjoy in this holiday season, but there is a slow-motion crisis unfolding in the government bond markets that equity investors continue to ignore at their peril,” wrote Edwards, who identifies himself as an “uber bear” on the social-media platform X and has long been known for his negative calls.

“Surely we can all agree that rising bond yields will break the equity market at some point? But when?,” asks Edwards in a Thursday research note.

“Even if the AI narrative is wildly overblown, what usually bursts bubbles is a Fed tightening cycle but there is no prospect of that!,” he writes. “However, these are unusual times and with cashflow yield now so very low and bond yields so very high, it may take very little to trigger a crisis in confidence in equities.”

For the biggest seven technology companies, free cashflow yield—operating cashflow minus capital expenditures relative to market value—has fallen to just 2%, according to SocGen, Capex has risen by 60% year over year.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.