Roubini Says Higher Bond Yields Signal Growth, Not Recession Risk

Nouriel Roubini pushed back against the view that a sharp rise in bond yields across the US, UK, Japan, Germany and France signals a recession or a bear market for equities. The NYU economist argued the recent move is more consistent with a private-sector investment boom than with stagflation or a fiscal crisis.

A rise in yields could reflect three very different drivers, Roubini wrote. The first is higher inflation from supply shocks such as protectionism and war-driven disruptions to oil flows, which would be stagflationary, cutting GDP growth, lifting inflation and dragging down equity prices. The second is unsustainable fiscal deficits, which could push yields higher either through expectations of central-bank monetization or through higher sovereign-risk premia that crowd out private spending.

The third factor, Roubini said, is a private-sector capital-expenditure boom on AI that pushes up nominal yields because it fuels demand for credit, not because it signals higher inflation expectations. In that case, higher yields are a signal of stronger future growth and a positive for stock prices.

This last factor has been the dominant driver since ChatGPT launched in 2022, Roubini said. Since that point, US bond yields have risen from a pandemic-era low of 1% to around or above 5%, while US equities posted double-digit returns. Even through mid-August, the rise in yields coincided with new all-time highs for the S&P 500, he noted.

The positive correlation between bond yields and stock returns can turn negative when inflationary shocks lead to tighter monetary policy or when there are serious concerns about fiscal sustainability, Roubini said. That is what happened in 2022, when surging deficits and post-covid inflation drove a sharp rise in yields and a bear market for US and global equities. A similar pattern followed Trump’s April 2025 “Liberation Day” tariff announcement, during the oil shock triggered by the war with Iran, and in the most recent global bond rout partly led by another spike in oil prices and fiscal concerns.

When a correction in equities is driven by bond yields, long-duration assets like tech stocks tend to react more sharply than shorter-duration assets like mature firms, Roubini said. During the 2022 bond rout, the S&P 500 fell about 15% while the tech-heavy Nasdaq fell more than 20%, with many individual growth stocks falling more than 30%. The same pattern held during this month’s bond rout.

Despite those periodic dislocations, tech-sector returns have been higher than those of traditional equities for the last five years. Roubini said the rise in bond yields in high-innovation economies like the US is mostly driven by real yields, not by an increase in inflation expectations, which remain well anchored slightly above 2%. A rise in real yields is what one would expect given tech firms’ and hyperscalers’ massive borrowing to finance data-center construction.

The US fiscal deficit is high but has plateaued near 6% of GDP and is likely to fall in the next few years thanks to higher potential growth and some additional tariff revenue, Roubini said. A US economy with potential output growth of 3% or more has a better medium-term fiscal outlook than Japan or the eurozone, which are stuck with growth rates of 1.2% and lower.

“Both the secular and recent rise in global bond yields largely reflect structural factors like the end of the post-2008 Great Stagnation, higher potential growth and investment, and higher real yields,” Roubini wrote. “These are all positives for America and (at least some) global equities.”

The relationship between yields and stocks is more complex than the naive view implies, Roubini said. Lower bond yields are usually a sign of economic weakness, which in turn implies weakness for stock markets. When growth is strong and risk appetite is high, equities do well and bond yields tend to rise. The current move may be a sign of the latter.