The Big Question: Bond Yields are Rising – What Does that Mean for Equities?

What does the bond market have to do with equities? With bond yields rising to multi-year highs, particularly in the U.S., that’s a question more investors might want to know the answer to.

While rising bond yields don’t affect stocks directly, they can influence stock valuations, reduce the relative appeal of dividend-paying sectors and, ultimately, shape the overall performance of your portfolio. And there is some concern that the pressure on bond markets may not ease anytime soon.

Here’s a closer look at what’s behind the shift in the bond market and how it might affect your portfolio.

What’s driving the bond market?

The fixed income market doesn’t typically capture investor attention like equities do. But every so often, something happens to bond yields that people can’t ignore. In September, a few of these things happened. The yield on the 30-year U.S. Treasury reached 5.65 per cent¹ – its highest level since 2004; yields on other government bonds reached highs not seen in years; and the 10-year Government of Canada benchmark bond yield reached 3.99 per cent (it’s since surpassed 4 per cent), the highest it’s been since October 2023.²

So, what’s happening with bond yields? Inflation is one factor. Sustained high oil prices have people worried that price pressures could linger, which could force central banks to act, which in turn could raise borrowing costs. In fact, the U.S. Federal Reserve recently raised its benchmark rate by a quarter point to try and slow down inflation.

The challenge now, however, is that while higher rates are an attempt to slow spending, they can’t resolve an oil supply disruption causing inflation. If investors think inflation could stay high as a result of such a disruption, they might demand higher yields on long-term bonds to compensate for the loss of purchasing power. Long-bond yields reflect, in part, that perception, given where the U.S. 30-year bond is at. And considering the pressure on longer-term bonds, it suggests investors are skeptical the Fed will be able to get inflation under control anytime soon.

Inflation isn’t the only challenge. Rising government debt and deficits mean countries need to raise more money through the fixed income market by issuing new bonds. When more bonds are brought to market, governments often need to offer higher yields to attract enough buyers, especially if investors have other attractive opportunities competing for their capital. That’s the case today, as the enormous investment required to fund the massive artificial intelligence infrastructure buildout that is competing for many of the same dollars flowing through capital markets.³  

What is the impact of bond yields on stocks?

You might think that rising yields is a bond-market problem, but yields influence the value of virtually every financial asset, including stocks. That’s because government bond yields are seen as the baseline return investors can potentially earn, while taking one of the lowest levels of risk available in financial markets.

Think of it this way: If you could buy an investment that would give you an almost guaranteed return from a government bond, would you invest in another asset class where you have to take on more risk just to equal that return? Perhaps not.

Rising prices and higher borrowing costs can also cause investors to assess whether a business can continue to grow and justify their higher share price. If people think a business may not be able to maintain their growth if prices continue to rise and consumer habits change, then valuations could decline, and stock prices could fall as a result. Higher bond yields could make stocks, especially those priced on expectations of profits far in the future, look less attractive to investors.

Which stocks could be affected?

Growth-oriented companies – much of whose value depends on profits expected years from now – and dividend-generating stocks tend to be particularly susceptible to rising bond yields. In the case of growth-oriented companies, if investors can potentially earn strong returns with less risk, they may be less willing to invest in companies that carry greater risk and may not generate meaningful returns for years.

Dividend payers, which tend to be concentrated in sectors like utilities, pipelines, telecommunications companies and real estate income trusts, compete with bonds more directly because of their steady cash distributions.

When bond yields are low, dividend stocks might offer the potential for both more attractive yields and share price appreciation. But when bond yields rise, investors may be able to earn more income from government and investment-grade bonds than from dividend stocks.

Rising bond yields can also affect companies. For instance, firms with strong cash flows and less reliance on debt may be in a better position to sustain their growth. On the other hand, heavily indebted companies could face greater pressure to tighten their belts as the cost to borrow rises.

How can investors respond?

Of course, higher bond yields don’t mean stocks are headed for a fall. The benchmark S&P 500 has continued to reach new highs throughout much of 2026, though a small group of technology companies has driven much of that performance. In late September, more companies in the index were hitting 52-week lows than 52-week highs.⁴

If markets have taught us anything, it’s that economic fortunes and interest rates can change quickly. Rather than trying to predict where bond yields or stocks will go next, many experts argue a diversified portfolio is a path to weather shifts in markets, the economy and rates.