American banking giant JPMorgan Chase has warned that small-cap and mid-cap stocks face growing pressure from rising 30-year government bond yields.
The bank’s strategists, led by Eduardo Lecubarri, said rising long-term yields reflect mounting government debt and budget deficits rather than changes in short-term interest rates alone.
JPMorgan’s analysis found that countries with public debt exceeding 100% of GDP and ongoing budget deficits account for approximately 60% of global GDP.
Rising Treasury yields threaten smaller stocks by increasing borrowing costs, slowing expansion and pressuring valuations. Higher bond yields also make government debt more attractive relative to equities, weakening demand for smaller companies and their dividend-paying stocks.
JPMorgan also indicated that the share of US small- and mid-cap stocks with dividend yields above the 30-year Treasury yield fell from 19% at the start of 2024 to 9%, a 24-year low. Historical declines in this measure have coincided with weaker stock returns over the following 12 months.
Mid-cap stocks also face valuation pressure as rising Treasury yields increase discount rates and reduce the present value of future earnings.
Higher borrowing costs can curb investment and expansion, while weaker economic activity may hurt demand. JPMorgan identified similar pressures in the UK and continental Europe, alongside broader fiscal concerns in China and Japan.
Government debt drives Treasury yields higher
At the same time, the strategists warned that rising 30-year Treasury yields increasingly reflect fiscal risks rather than Federal Reserve policy. Interest rates, inflation, and economic growth explained about one-third of long-term yield movements since 1990 but did not fully account for the increase since 2023.
The U.S. term premium has doubled, while the gap between the 30-year Treasury yield and the federal funds rate widened to 1.42%, from 0.73%. Heavy government borrowing is adding to the pressure as investors demand higher returns to absorb growing bond supply.
Higher yields increase government debt-servicing costs, leaving less room for public spending and potentially pushing borrowing costs higher as fiscal concerns intensify.
Opportunities in smaller stocks
Despite the risks, JPMorgan still sees opportunities in small- and mid-cap stocks offering attractive dividend yields relative to local 30-year government bonds.
Its model portfolio added Dashenlin Pharmaceutical Group, a Chinese pharmacy chain valued at approximately $3 billion, and Befesa, a German industrial recycling company worth about €1.4 billion. Both received Overweight ratings.
However, attractive dividend yields do not eliminate risks from debt, earnings volatility or falling share prices.
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