Business Insider "You just end up with an air pocket," says MRB Partners' Phillip Colmar on rising yields' impact on AI stocks.
- Rising Treasury yields could soon sink stocks, warns MRB Partners' Phillip Colmar.
- He says rising yields will weigh on AI companies' ability to monetize their investments.
- To defend against an AI-led decline, Colmar said to look at healthcare and financials.
Rising bond yields have had investors on edge over the last week, and one strategist warns that things could soon get a lot worse.
Phillip Colmar, a partner of global strategy at market research firm MRB Partners, said in a note to clients this week that long-term bond yields have stocks "on the brink" of a de-risking episode.
Yields on the 10-year Treasury have shot above 4.7% this week, while 30-year yields have risen above 5.2%. Bond investors have grown increasingly worried about rising government debt levels, strong expected economic growth, and the ongoing inflationary pressures from the US-Iran war.
If long-term yields continue to creep up, with the 10-year approaching around 5%, they could spook investors enough to spark a 15-20% decline in the S&P 500, Colmar told Business Insider on Friday. "As long as it looks like it's going up and it's not going to be stopped, you could end up with a de-risking event that starts blow 5%," he said, referring to 10-year yields.
Colmar didn't have a call per se on where yields go from here, but said he remains in a pro-growth investment stance for the time being.
He did, however, note that the Treasury's efforts to contain long-term bond yields this week could backfire and send yields even higher.
Treasury Secretary Scott Bessent said the Treasury would increase its bond buybacks to help cut the supply of bonds on the market, and therefore suppress yields. Colmar said this could give the impression that the Trump administration is trying to keep yields down without addressing the cause of their surge — inflationary concerns.
It could also send the signal that the Treasury is panicking, since the move wasn't coordinated with the Fed, which has said it wants to let government bonds roll off its balance sheet, Colmar said.
"The market sniffs out the panic," he said.
Why rising yields could hurt stocks #
Rising long-term bond yields could cause stocks to drop for a couple of reasons.
First, higher yields tend to weigh on growth stocks, since investors compare a risk-free long-term rate of return with the uncertain long-term returns offered in the equity market. With much of the market tied up in the long-term promise of an AI productivity boost, a floundering AI trade would drag the rest of the market down with it.
Second, rising government bond yields also influence the borrowing costs of AI companies, which are spending heaps of capital on building out AI infrastructure. A higher cost of borrowing cuts into total returns on invested capital and reduces profits.
With AI companies under immense pressure to monetize their investments and earnings expectations so high, Colmar said higher borrowing costs would extend the timeline for achieving the expected monetization. That, in turn, causes investors to lower their earnings expectations and demand greater capital discipline, sparking a decline in stock prices, Colmar said.
"You just end up with an air pocket between what might be a decent theme, but expectations were just too high and they can't be met now," he said.
For investors worried about bond yields rising further, Colmar shared a few of moves to help shore up a portfolio. One is to trim exposure to AI stocks and add to defensive areas of the market, such as the healthcare sector, which tends to be less rate-sensitive than other traditionally defensive sectors.
He also said stocks in the financials sector tend to do well in a rising rate environment.
Examples of funds that offer exposure to these trades include the Vanguard Health Care ETF (VHT) and the Financial Select Sector SPDR Fund (XLF).
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