Investing.com -- Wolfe Research economist Stephanie Roth has turned more cautious on risk assets, warning that the tension between rising bond yields and resilient equity markets is becoming increasingly difficult to sustain and revising the firm's Federal Reserve call to push all expected rate cuts back to the second half of 2027.

In a weekend note to clients, Roth argued that "something eventually has to give," with rates increasingly pricing a higher-for-longer inflation regime while equities continue to reflect a far more benign outcome.

Wolfe Research identified three plausible paths to lower yields, including disappointing growth, equities weakening enough to trigger a broader risk-off move, or President Trump reaching his pain threshold and de-escalating the war in Iran.

However, they said none of those scenarios are particularly constructive for markets.

The firm believes the third option has likely not yet been reached, while the first two would by definition be negative for risk assets. "Our bias is that rates likely continue repricing higher until either growth weakens, equities begin to crack more materially, or Trump reaches his pain threshold and takes a deal with Iran," Roth commented.

Persistent upside inflation surprises, driven increasingly by the Iran conflict and AI-related capital expenditure and memory demand, are pushing inflation forecasts higher, leaving the Fed "a long way from being able to calm markets," Roth wrote.

The global bond selloff that accelerated Friday began with hot producer price data in Japan before spreading to the U.K., which faces renewed government instability concerns, and then radiating across broader markets. Treasury yields rose by as much as 12 basis points, with some maturities hitting recent highs.

“Fed officials appeared increasingly concerned about the outlook. Among voting members, the mix skews slightly dovish, but even then the messaging has converged to inflation upside risks,” stated Roth. “Regional presidents have led the way in voicing their inflation worries, but a few governors, including Michael Barr and Chris Waller, have begun striking a similar tone.”