US bond yields have become the “elephant in the room,” but stock market investors are ignoring them.

Global bond yields continue to climb, but stock market investors seem to be turning a blind eye. Wall Street strategists generally believe that yields are not yet high enough to end the stock market bull run—but they also acknowledge that there is a clear tipping point for this call.

According to Bank of America’s latest Global Fund Manager Survey, institutional investors surveyed have allocated 56% of their portfolios to equities, the highest level since November 2021.

Meanwhile, the same survey shows that “disorderly bond yield increases” are seen as the second biggest threat facing the stock market, only behind concerns over an AI bubble; another 25% of respondents listed a new round of inflation as the biggest risk.

On Wednesday, the US Treasury unexpectedly announced an increase in the size of long-term Treasury buybacks, offering the market a brief reprieve—the 10-year US Treasury yield fell by 6 basis points that day to 4.65%, while the 30-year yield dropped 9 basis points to 5.19%. However, yields began rising again on Thursday.

Although “disorderly bond yield increases” top the risk rankings, institutional investors’ actual positioning is moving in the opposite direction of these concerns. The Bank of America survey shows that fund managers currently have a 56% allocation to equities, the highest in nearly three years.

JC O’Hara, Chief Market Technician at Roth Capital Partners, said that although the stock market is operating in an environment of rising yields, it remains near record highs and investors “should be bullish, or at least stay constructive.”

He pointed out that expectations of improved earnings, a brightening economic outlook, and waning market attention to the Middle East situation have together fueled a rebound in risk appetite. When risk sentiment improves, the S&P 500 typically delivers strong forward returns.

Tyler Richey, editor of Sevens Report Technicals, takes a more cautious stance. In an interview, he said that rising yields are the “elephant in the room” and pose a potential threat to a stock market that has been choppy after reaching record highs.

Some strategists are shifting the analytical focus from yield levels themselves to the shape of the yield curve. Ned Davis Research Chief US Strategist Ed Clissold noted on Tuesday that the stock market is currently in the “sweet spot” of the yield curve.

Currently, the 10-year Treasury yield stands about 49 basis points above the 2-year yield. Clissold defines the S&P 500’s most stable and lucrative environment as when the 10-year yield is no more than 150 basis points higher than the 2-year—a “mild positive slope yield curve.”

According to NDR’s historical data going back to 1976, the S&P 500 has delivered an average annualized return of around 11% in this setup.

Even the current stock market bulls generally admit that if yields keep rising, they will eventually exert substantial pressure on the market.

Liz Ann Sonders, Chief Investment Strategist at Charles Schwab Center for Financial Research, said:

“Current levels are still within the acceptable range, but I think if the (10-year yield) inches closer to 5%, it’s likely to spark significant volatility just as it did in 2023.”

From late July to late October 2023, the 10-year US Treasury yield briefly touched 5%, during which time the S&P 500 fell by 10% in total.

Matt Maley, Chief Market Strategist at Miller Tabak + Co., put it simply over the phone: “Bond yields start climbing and the stock market chooses to ignore it—until it can’t anymore.”