JPMorgan Warns Rising 30-Year Treasury Yields Threaten Small-Cap Stocks
JPMorgan warns that rising 30-year Treasury yields pose an increasing threat to small- and mid-cap stocks, driven primarily by worsening government debt rather than the path of short-term interest rates.
Strategists from Eduardo Lecubarri's team noted that the proportion of U.S. small- and mid-cap stocks with dividend yields exceeding 30-year Treasury yields has dropped from 19% at the beginning of 2024 to 9%, marking a 24-year low.
Recently, the 30-year yield reached about 5.70%, a 24-year high, with the term premium widening, and the spread between the 30-year yield and the federal funds rate rising from 0.73% to 1.42%.
Historically, about 60% of global GDP comes from countries with debt exceeding 100% of GDP and fiscal deficits, which is a 3-sigma event that investors seem to overlook and may lead to surprises.
Traditional drivers (short-term rates, inflation, real GDP) cannot explain the rise in yields since 2023, with models predicting only about 38% of the variation by 2026.
Funds are flowing from high-interest-sensitive small-cap stocks to higher-yielding Treasuries or large-cap stocks, with small-cap stocks facing rising financing costs and declining relative yield attractiveness, benefiting investors holding high-yield Treasuries while pressuring small firms reliant on debt financing.
Source: Public Information
ABAB AI Insight
JPMorgan's SMid View report indicates that the rise in 30-year yields reflects more the deterioration of government fiscal health and the widening term premium rather than the Fed's short-term policy path, with small-cap stocks losing their relative dividend advantage.
The strategy team views the share of global GDP from high-debt and deficit countries as a historically rare 3-sigma event, with resources shifting from equity risk appetite to fixed-income safe assets, putting small-cap stocks under greater capital cost pressure due to higher leverage and floating-rate debt.
Similar cases can be seen in the performance pullback of small-cap stocks relative to large-cap stocks during rising interest rate cycles; we are currently in a phase where long-term yields are driven by fiscal factors, and small-cap stock valuations and financing are under pressure.
This represents a transfer of pricing power: the rise in risk-free yields causes capital to be repriced from risk assets, with the mechanism being government debt competing with private capital leading to elevated term premiums, thereby compressing the relative attractiveness and growth financing space of small-cap stocks.
ABAB News · Law of Cognition
Long-term yields rise, small-cap relative advantage disappears.
Fiscal debt elevates term premiums, capital costs are repriced.
Dividend comparisons to risk-free yields determine capital flows.