SocGen warns higher bond yields will snap equity rally at some point

Investing.com -- Societe Generale has cautioned that rising government bond yields pose a growing threat to equity markets, warning investors that the rally fueled by strong corporate earnings and artificial intelligence enthusiasm cannot last indefinitely.

“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,” analyst Albert Edwards wrote in the firm’s Global Strategy Weekly note.

Edwards said that yields across major bond markets have been climbing steadily as concerns over debt sustainability and deficit spending mount.

According to Societe Generale (OTC: SCGLY), “super loose monetary policy eventually ignited CPI inflation and ended the long secular bull market for bonds and the Japanification theme.”

The report added that rising borrowing costs and record levels of public debt are pushing central banks closer to what it called “fiscal dominance of monetary policy.”

Despite this backdrop, equities have continued to perform strongly, lifted by resilient earnings from mega-cap technology companies and optimism surrounding AI.

Edwards observed that investors have shrugged off the “relentless rise in long bond yields by feeding off news of strong profits … and the promise of more to come.”

The bank pointed out that the justification for high valuations under the “TINA” mantra, There Is No Alternative, no longer holds now that interest rates are substantially higher.

“Surely we can all agree that rising bond yields will break the equity market at some point? But when?” Societe Generale asked.

For now, Edwards said, investors appear to be “following former Citigroup (NYSE: C) CEO Chuck Prince’s famous July 2007 advice to keep dancing while the music is still playing.”

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