Educational content. This article explains the mechanism that links government bond yields to equity index prices and the historical regimes in which that link changed sign. It does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. CFD trading carries significant risk of loss and may not be suitable for all investors. Past patterns do not guarantee future results.
Stocks fall when bond yields rise because a share is worth the earnings it will produce in the future, discounted back to what those earnings are worth today, and the government bond yield is the rate used to discount them. Raise the rate and the same future earnings are worth less now.
That sentence explains the equity selloff of 2022, the sharp repricing of technology shares whenever the 10-year yield jumps, and the reason a rate decision moves an index that contains no bonds at all. It does not explain 2021, when the 10-year yield rose by more than half a percentage point and the S&P 500 gained about 27 percent, or 2013, or most of the two decades before 2020. Both the rule and the years it fails are the subject of this article.
For the mechanics of trading an index as a CFD, see CFD index trading and what is indices trading. This article is about the macro input rather than the instrument.
What Is the Relationship Between Stock Prices and Bond Yields?
The relationship between stock prices and bond yields is inverse in some decades and positive in others, and the historical record is usually published the other way round, as the correlation between stock returns and bond returns.
The translation matters, because bond prices move opposite to bond yields. When stock returns and bond returns are positively correlated, stocks and bonds fall together, and since bonds fall when yields rise, that is the regime in which rising yields hurt equities. When stock returns and bond returns are negatively correlated, stocks rise while bonds fall, which means stocks rise while yields rise.
| Period | Stock and bond returns | Stocks versus yields | What was moving yields |
|---|---|---|---|
| 1966 to 2000 | Positively correlated | Stocks fell when yields rose | Inflation and the policy response to it |
| 2000 to 2020 | Negatively correlated or near zero | Stocks rose when yields rose | Growth expectations, with inflation quiescent |
| 2022 onward | Positively correlated again | Stocks fell when yields rose | The fastest tightening cycle since the 1980s |
The 2022 episode was the clearest demonstration in half a century. The US 10-year yield rose from about 1.5 percent in January to about 3.9 percent in December, the S&P 500 fell 19.4 percent, and Treasury bonds fell too. It was the first calendar year since 1977 in which both US stocks and US bonds delivered negative returns.
So the popular statement that stocks fall when yields rise is a description of the current regime and of the inflationary decades, not a law of finance. What follows is the mechanism that makes it true when it is true, and the condition that decides the sign.
Which Yield Matters: Nominal, Real, and the Term Premium
The yield that matters for equities is the long-dated government bond yield, most often the US 10-year Treasury, because it is the closest observable proxy for the rate at which distant corporate earnings are discounted.
A 10-year yield can be decomposed into three parts, and the three carry different messages for equities. The expected path of short rates is what the market thinks the central bank will do. Expected inflation is compensation for the loss of purchasing power over the life of the bond. The term premium is the extra yield demanded for holding duration risk rather than rolling short-term paper.
A rise in the real component, which is the nominal yield less expected inflation, is the part that raises the discount rate in real terms and puts direct pressure on valuations. This is the same series that governs the gold market, and for the mechanism on that side see why gold rises when real yields fall. A rise driven purely by inflation expectations is more ambiguous for equities, because nominal corporate earnings also rise with inflation, at least until margins compress.
The policy rate itself is the anchor at the front of the curve, and how central banks move it is covered in how central banks move forex and, for the US specifically, in how FOMC meetings affect the US dollar.
The Mechanism: Four Channels From a Yield to a Share Price
A change in the bond yield reaches a share price through four channels: the discount rate applied to earnings, the return available without equity risk, the cost of corporate borrowing, and the information the yield move carries about growth.
The first three push in the same direction: higher yields, lower share prices. The fourth can push the other way, and that is the whole reason the relationship has changed sign historically.
Channel 1: The Discount Rate
A higher bond yield raises the rate at which future earnings are discounted, which mechanically lowers the present value of those earnings and therefore the price of the share.
The required return on a share is the risk-free rate plus an equity risk premium. If the risk-free rate rises by one percentage point and the risk premium does not change, the required return rises by one percentage point, and every future dollar of earnings is worth less today. The size of the effect depends entirely on how far away the dollar is.
| Earnings arrive in | Present value at 8 percent | Present value at 9 percent | Change |
|---|---|---|---|
| 1 year | 0.9259 | 0.9174 | -0.9% |
| 5 years | 0.6806 | 0.6499 | -4.5% |
| 10 years | 0.4632 | 0.4224 | -8.8% |
| 20 years | 0.2145 | 0.1784 | -16.8% |
| 30 years | 0.0994 | 0.0754 | -24.2% |
The table is arithmetic, not an estimate: it is one dollar discounted at 8 percent and at 9 percent. The one-point rise costs the near-term dollar less than one percent and the thirty-year dollar almost a quarter of its value. That single asymmetry produces most of what traders observe on a yield-driven day.
Channel 2: Competition From Risk-Free Income
A higher bond yield raises the return an investor can earn without taking equity risk, which makes shares relatively less attractive at an unchanged price.
When a Treasury bill pays close to nothing, an investor seeking income has few alternatives to equities, and money flows into the market for want of anywhere else. When the same bill pays 5 percent, an allocator has a choice, and the equity risk premium, the extra return equities are expected to deliver over bonds, has to widen for equities to remain competitive. It widens by the price falling.
This channel operates slowly, through allocation decisions rather than through same-day repricing, but it is the one that explains why the level of yields, and not only the change, matters over longer horizons.
Channel 3: Corporate Financing Costs
A higher bond yield raises what companies pay to borrow, which reduces the earnings that reach shareholders.
Corporate bond yields are priced as a spread over government yields, so a rise in the government curve passes through to new issuance and to refinancing. Highly indebted companies and those with near-term maturities feel it first, and the effect appears in reported earnings with a lag of quarters rather than days. Sectors differ sharply: utilities and real estate carry heavy debt loads and long-dated assets, while a cash-rich company with no borrowings can be a net beneficiary of higher rates through interest income on its cash.
Channel 4: What the Yield Move Says About Growth
A rise in the bond yield can also be a signal that the economy is stronger than expected, which raises expected earnings, and that is the channel that can outweigh the other three.
If yields rise because growth is accelerating, the numerator of the valuation, the earnings, rises alongside the denominator, the discount rate. Whether the share price goes up or down then depends on which moves more. In the 2000 to 2020 period, when inflation was quiescent, most yield moves were growth news, the numerator won, and stocks and yields rose together. Since 2022, most yield moves have been inflation and policy news, the numerator did not move, and the denominator won.
This is the condition that decides the sign of the whole relationship, and it is why the useful question is never whether yields rose but why they rose.
Equity Duration: Why Some Indices Fall Further Than Others
Indices do not fall equally when yields rise, because they differ in equity duration: how far into the future the earnings that justify their valuation are expected to arrive.
A company that earns steady cash today and pays most of it out has short equity duration, and a company valued for earnings a decade away has long equity duration. The discount table above shows why that matters: the same one-point rise in the discount rate costs the ten-year dollar ten times what it costs the one-year dollar. An index full of long-duration companies has more of its value in exactly the cells of the table where the loss is largest.
The 2022 calendar year sorted the major US indices almost exactly in that order.
| Index | 2022 calendar performance | Character of the constituents |
|---|---|---|
| Nasdaq Composite | -33.1% | Technology and growth, longest equity duration |
| Russell 2000 | Down by roughly a fifth | Small caps, floating-rate debt sensitivity |
| S&P 500 | -19.4% | Broad market, mixed duration |
| Dow Jones Industrial Average | About -8.8% | Industrials and dividend payers, shortest duration |
The small-cap case is worth separating, because the Russell 2000's sensitivity is not primarily a duration story. Smaller companies borrow at floating rates more often and refinance more frequently, so a rate rise reaches their interest expense through Channel 3 faster than it reaches a large company that has termed out its debt at fixed rates.
Historical Regimes: When Stocks and Yields Moved Together and When They Did Not
The sign of the stock and yield relationship has flipped twice in sixty years, and both flips coincided with a change in what was driving inflation.
1966 to 2000: The Inflation Regime
Through this period US stock returns and bond returns were positively correlated, which means stocks fell when yields rose, and the driver was inflation.
The correlation upturns were sharpest in 1966 to 1970 and 1977 to 1980, both periods of low unemployment, accelerating growth, and rising oil prices. When inflation is the dominant macro variable, an inflation shock raises the discount rate and squeezes margins at the same time, so bonds and equities are hurt by the same news. There was no diversification to be had between them.
2000 to 2020: The Disinflation Regime
Through this period the correlation was negative or near zero, which means stocks generally rose when yields rose, and the driver was growth.
Inflation ran below its long-term average for most of two decades, so a rising yield was usually the market pricing better growth rather than a worse price level. Bonds rallied when growth disappointed and equities fell, and the reverse, which is exactly the negative return correlation that made a bond allocation a hedge for an equity portfolio. Anyone who learned markets in this period learned that rising yields were an equity-positive signal, and for twenty years that was the correct lesson.
2022: The Regime Turned Back
In early 2022 the correlation turned positive again, and equities began falling on yield rises for the first time in a generation.
The trigger was the fastest US tightening cycle since the early 1980s, arriving after inflation had already moved well above target. Once inflation is the binding constraint, a central bank cannot cut into an equity selloff, so the put that equity investors had relied on for two decades was gone, and stocks and bonds fell together. The 2018 wobble had already shown the correlation deteriorating before 2022 made it unmistakable.
When the Relationship Breaks: Three Anti-Patterns
Three specific situations reverse or nullify the expectation that a higher yield means a lower index, and each has been visible in the last few years.
Anti-Pattern 1: A Growth-Driven Yield Rise
When the yield rises because growth expectations improve, equities have frequently risen with it, which is Channel 4 overpowering the first three.
2021 is the cleanest recent example. The US 10-year yield rose from about 0.9 percent to about 1.5 percent over the year while the S&P 500 gained roughly 27 percent, because the yield rise was the bond market pricing a reopening economy rather than a policy squeeze. 2013 behaved the same way: the yield rose from about 1.8 percent to about 3.0 percent during the taper tantrum, and the S&P 500 still finished the year up close to 30 percent. A trader who read those yield rises as an equity sell signal was wrong for two full years.
Anti-Pattern 2: Confusing the Level With the Change
The valuation effect comes from the change in the yield, not from its level, so a persistently high yield is not the same thing as a rising one.
An index can trade at a stable multiple with the 10-year at 4.5 percent, because that level is already in the price. What repriced the market in 2022 was not the destination but the speed of the journey there. This is the same distinction that separates the level of a real yield from its direction in the gold market, and it is the single most common way the relationship gets misapplied.
Anti-Pattern 3: Reading a Yield Fall as Good News
Falling yields are not automatically supportive of equities, because yields also fall when the market prices a recession.
In a growth scare, the 10-year yield falls while equities fall alongside it, because the discount rate is dropping for the same reason expected earnings are dropping. In such episodes the two channels cancel and then reverse. Yields collapsing into a recession has historically accompanied some of the deepest equity drawdowns, which is the mirror image of the same Channel 4 logic. Volatility rather than the yield is the better read on those days, and how to trade the VIX covers that instrument.
What Rising Yields Mean for Index CFD Traders
For a CFD trader the bond yield is context for the index chart rather than a signal, and the practical consequences are about which index is exposed and what the position costs to hold.
Three points follow from the material above. First, the yield release calendar and the equity volatility calendar are the same calendar: US CPI prints and Federal Reserve meetings move the 10-year yield and the index together, and spreads widen on both. Second, the index that reacts most to a given yield move is the one with the longest equity duration, which among the US indices quoted here is the tech-heavy US 100. Third, the direction of the reaction depends on what drove the yield, so a rate move alone does not determine the sign.
US Index CFD Specifications at Vanto
The four US index CFDs share a contract size of one index unit per lot and identical published financing, so a one-point move in the index is worth one unit of the quote currency per lot on all four, and the notional carried by a single lot differs only because the index levels differ.
| Symbol | Index | Level, snapshot | Notional per lot | Minimum lot | Published swap, long / short |
|---|---|---|---|---|---|
| US30 | Wall Street | 53,174 | USD 53,174 | 0.01 | -6.25 / +1.25 |
| US100 | US Tech 100 | 29,174 | USD 29,174 | 0.01 | -6.25 / +1.25 |
| US500 | US SP 500 | 7,679 | USD 7,679 | 0.01 | -6.25 / +1.25 |
| US2000 | US Small Cap 2000 | 2,956 | USD 2,956 | 1.0 | -6.25 / +1.25 |
Source: Vanto calculator data, snapshot 2026-09-03. Contract size is 1 index unit per lot on all four, quote precision 2 decimals, profit currency USD, triple-swap day Friday. Maximum leverage on the indices class is up to 1:100.
Two features of the table are worth reading carefully. The published swap is the same on all four, so the cost of carrying a long US index position past the daily rollover does not distinguish between them: the difference in how they respond to a yield move comes from the underlying index and not from the instrument. The minimum trade size does distinguish them, because US2000 has a minimum of 1.0 lot against 0.01 on the other three, so the smallest US2000 ticket carries roughly USD 2,956 of notional against about USD 292 for the smallest US100 ticket. What is contract size in trading covers the arithmetic in full.
The Financing Charge Is Itself a Rate Story
The overnight swap on an index CFD is a financing charge, so the same interest rates that move the index also set what a position costs to hold.
A long index CFD is economically a financed position in the basket, and the long side is charged while the short side receives a smaller credit. When the short-term rate environment shifts, published swap values shift with it. The charge is negligible over an intraday position and compounds into a real cost over weeks, with three days of financing booked on Friday for indices. What is swap in trading explains how the charge is calculated and what is triple swap day covers the weekend convention.
At the indices cap of 1:100 the required margin on one lot is 1 percent of notional, about USD 292 on US100 at the snapshot level, and a one percent move in the index changes the position by the full margin amount. Leverage amplifies both the gains and the losses that follow a yield-driven repricing.
Frequently Asked Questions
Why do stocks fall when bond yields rise?
Stocks fall when bond yields rise because the yield is the rate at which future corporate earnings are discounted back to a present value, and raising that rate lowers the value of every future dollar. A one percentage point rise in the discount rate cuts the present value of a dollar due in twenty years by about 17 percent, which is why long-duration growth shares fall furthest.
Do stocks always fall when interest rates go up?
No. US stocks and bond yields rose together for most of the period from 2000 to 2020, and the S&P 500 gained about 27 percent in 2021 while the 10-year yield rose by more than half a point. The sign depends on why the yield moved: a rise driven by better growth raises expected earnings at the same time as the discount rate, while a rise driven by inflation or policy tightening raises only the discount rate.
Why does the Nasdaq fall more than the Dow when yields rise?
The Nasdaq falls more because its constituents have longer equity duration, meaning a larger share of their value sits in earnings expected many years ahead, and the discount-rate effect grows with distance. In 2022 the Nasdaq Composite fell 33.1 percent while the Dow fell about 8.8 percent, with the S&P 500 between them at 19.4 percent.
What is the correlation between stocks and bonds?
The correlation between US stock and bond returns was positive from 1966 to 2000, negative or near zero from 2000 to 2020, and turned positive again in early 2022. A positive correlation means stocks and bonds fall together, which is the regime in which rising yields hurt equities, and 2022 was the first calendar year since 1977 in which both delivered negative returns.
Which bond yield should equity traders watch?
The US 10-year Treasury yield is the standard reference, because it is the closest observable proxy for the rate at which distant earnings are discounted. Splitting it into the real yield and the breakeven inflation rate is more informative than the nominal number alone, since the real component is what puts direct pressure on valuations.
Does the overnight financing cost on an index CFD change when rates change?
Yes. The overnight swap on an index CFD is a financing charge derived from prevailing rates, so published swap values move as the rate environment moves. At the snapshot date the four US index CFDs at Vanto all carried a published swap of -6.25 on the long side and +1.25 on the short side, with triple swap booked on Friday.
Follow the Rate Cycle on Vanto
The bond yield is one of two macro inputs that move equity indices, and the other is the currency the index is quoted in, which is covered in the US dollar index guide and, for the clearest single case of a currency driving an index, in why Japanese stocks rise when the yen falls. For how policy decisions transmit into prices across asset classes, see how central banks move forex and how CPI affects the US dollar. For the instrument mechanics behind an index position, from contract size to sessions, see CFD index trading and indices trading strategies. Live index spreads, swaps, and margin requirements are in the trading calculator, and a demo account lets you follow a yield-driven session on a live chart without risking capital.
Risk warning. Trading securities, futures, options, and contracts for differences are complex financial instruments that require knowledge and understanding. Prices can fluctuate significantly and securities may become valueless. Investors may incur losses exceeding the potential for profits. Trading on margin can result in losses greater than the amount initially deposited. Past performance is not necessarily a guide to future performance. The information in this article is for educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. Consider whether CFD trading is appropriate for your circumstances and seek independent advice if necessary.