Long-term Treasury yields have climbed above 5%, reaching their highest level in nearly two decades while stock valuations remain elevated. The combination is forcing investors to weigh the appeal of equities against bonds offering more than 5% with theoretically minimal credit risk.
Warren Buffett has warned for decades that interest rates can strongly influence asset prices. He has compared higher rates with a stronger gravitational pull on valuations, meaning rising borrowing costs can weigh more heavily on stocks and other assets.
That risk was less prominent through much of the period since the early 1980s, when rates generally declined or stayed very low. The current environment leaves less room for error, although yields above 5% do not make long-term Treasuries a guaranteed bargain.
Treasuries with maturities of 10 to 30 years remain sensitive to interest-rate changes, and persistent inflation could push rates toward 6%, causing significant bond losses. Higher starting stock valuations have generally been associated with lower future returns, so the double-digit annual gains investors have grown accustomed to may be difficult to repeat. The implication is not that stocks should be sold or that a crash is imminent, but that the balance between stock and bond risks may be changing.