Bond market rout is 'most underappreciated' risk to equities, warn fund managers

08 September 2026 Four experts weigh up how real the threat of a bond-driven equity sell-off actually is. Investors have painfully learned in 2022 how close together bonds and equities can move. Right now, the troubling direction of bond yields might be preparing the ground for a knock-on effect in stock markets. In fact, a sell-off in government bonds is the biggest risk facing equity markets this year, according to Ben Ritchie, head of developed market equities at Aberdeen Investments. When discussing the rise in UK and US bond yields over recent months, he said: 'It is probably the most underappreciated downside risk'. While this is not the base case, further yield increases are still considered 'a real risk' and one of the firm's contraction scenarios for markets is precisely a bond market rout, with fiscal concerns, heavy government borrowing or aggressive central bank balance-sheet reduction triggering a sharp rise in long-dated bond yields and an equity sell-off in tandem. 'Bond markets are sending a warning about fiscal sustainability, particularly in the US, UK and parts of Europe, but we are not yet seeing the kind of dysfunction associated with systemic crises,' he said. The UK 10-year gilt yield, a benchmark for the government's borrowing costs, stood at 5.2% on 8 September 2026, against 4.8% for its US equivalent, according to FT data. Both have risen over the past few months, as the chart below shows. US (left) and UK (right) 10-yr government bond yields Source: Financial Times Two forces are behind the move, according to Ella Davies, multi-asset fund manager at Schroders. Markets are gradually recognising that the balance of risk has shifted towards higher inflation rather than weaker growth, and investors are having to work out whether new Federal Reserve chair Kevin Warsh's early hawkish speeches reflect genuine conviction or mask more dovish instincts underneath. 'We remain constructive on equities, as we have for several years: strong earnings growth remains the pre-eminent driver of returns,' Davies said. 'But bond yields matter. The past five years suggest that equity markets are unsettled less by a particular yield level than by the speed of the move or the breach of a psychological threshold. For us, 5% on the US 10-year treasury is the next level that could give equities indigestion.' For Gemma Cairns-Smith, investment specialist at Ruffer, a disorderly bond sell-off dragging equities down with it is a risk investors should take seriously, though the current move still looks more like an orderly repricing as investors reassess how long interest rates need to stay high. What matters from here, she said, is not only how high yields rise, but the pace and volatility of the move. 'The more dangerous pathway would be an abrupt rise in yields that markets have not anticipated, particularly if concerns shift from monetary policy towards fiscal credibility and investors demand greater compensation for holding long-dated government debt,' she said. 'In that scenario, a so far orderly repricing could quickly become a disorderly sell-off that pulls equities down with it.' The boom in AI-related capital spending is a separate risk to watch, Cairns-Smith added, since it has driven a sharp rise in earnings expectations, leaving both forecasts and valuations more fragile than usual. If that spending slows, relies increasingly on debt, or fails to generate the returns investors expect, markets may be forced to reassess those expectations sharply. CJ Cowan, portfolio manager at Quilter, was less worried for now, noting how the Bank rate, the Bank of England's main interest rate, is currently around the levels seen in 2003 and 2004 and gilt yields have simply followed it back to where they were then. 'The yield curve is not particularly steep and is around the historical average, so this is not necessarily the market crisis that some headlines suggest,' Cowan said. 'This is not to say it won't have a very real and potentially painful effect on the economy, but it is not a reason to declare bonds dead as an investment.' 'At the moment, risks do not appear to be weighing particularly heavily on equities,' he said. Both the S&P 500 and FTSE 100 are up more than 10% so far this year, and over three years they are up by around 80% and 60% respectively. 'Returns have been a little harder to come by over the past month, but that is a very short period of time. After a strong first half of 2026 and given elevated valuations, a short breather is probably healthy,' he concluded.