Investing.com -- The climb in 30-year government bond yields poses a risk to small- and mid-cap (SMid) stocks, JPMorgan says, saying the move reflects government debt levels more than the path of short-term interest rates.

Strategists led by Eduardo Lecubarri said that for the first time in history, about 60% of global GDP sits with governments running debt above 100% of GDP and a deficit. This is a 3-sigma event investors "seem to be ignoring," they wrote, and the kind of unprecedented situation that tends to deliver "nasty surprises."

Bulls argue the rise in 30-year yields over the past three years mainly follows higher short-term rates, but JPMorgan said its work shows otherwise. Fed funds rates, inflation and real GDP growth, which explained about a third of yield moves since 1990, failed to explain the rise since 2023, including most of this year’s move.

Instead, the U.S. term premium has doubled. The gap between the 30-year yield and the Fed funds rate has widened to 1.42% from 0.73%, a level seen before only after the Fed funds rate fell more than 70%, which the strategists said is unlikely now. The one driver near its 3-sigma threshold is the government’s financial health, with debt-to-GDP at record levels. Lecubarri said the pattern affects the U.K., parts of continental Europe, China and Japan.

For SMid investors, the share of U.S. small- and mid-cap stocks with a dividend yield above the 30-year Treasury yield has dropped to 9% from 19% since the start of 2024, a 24-year low. Similar declines show in the U.K. and continental Europe. Falls in this measure have historically coincided with slower 12-month forward returns.

The share is similar to levels in the 1990s, but "these are not the 1990s," strategists noted. Then, the dollar was rising, real GDP growth was stronger and the 30-year yield was falling.

JPMorgan screened global SMid stocks for the highest "excess dividend yield," the gap between a stock’s dividend yield and the local 30-year yield. The bank added Dashenlin Pharmaceutical Group (SS:603233), a $3 billion Chinese company, and Befesa (ETR:BFSA), a €1.4 billion German-listed company, both rated Overweight, to its model portfolio.

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