The U.S. 30-Year Treasury yield ([TYX]) climbed to an intraday high of 5.15% earlier this week on Monday (5/18), marking its highest level in nearly two decades—dating back to June 2007.
The recent surge in Treasury yields has meaningfully reshaped the relative appeal of stocks and bonds, prompting investors to reassess whether equities continue to offer sufficient compensation for risk in a higher‑rate environment. The U.S. 30-Year Treasury yield (TYX) climbed to an intraday high of 5.15% earlier this week on Monday (5/18), marking its highest level in nearly two decades—dating back to June 2007. As illustrated in the chart, this milestone reinforces the market’s growing expectation that interest rates may remain elevated for an extended period.
While inflation peaked in 2022 and has moderated meaningfully since then, investors continue to question the likelihood of a full return to the Federal Reserve’s 2% target. Several structural and cyclical forces are contributing to this skepticism, including persistent labor market tightness, ongoing tariff and trade-related uncertainties, and elevated energy costs. Together, these factors suggest that inflationary pressures may prove more durable than previously anticipated, supporting the “higher-for-longer” rate narrative.
Against this backdrop, the Equity Risk Premium (ERP) has come under increasing pressure. The ERP is defined as the spread between the S&P 500’s earnings yield (E/P, the inverse of the P/E ratio) and Treasury yields—commonly the 10-year and 30-year—which serve as proxies for the risk-free rate. This measure is widely used to assess whether equities are adequately compensating investors for taking on risk relative to long-duration government bonds.
In recent years, strong equity market performance has pushed valuations higher, with price appreciation outpacing underlying earnings growth. As a result, the earnings yield has compressed at the same time Treasury yields have risen sharply, leading to a meaningful narrowing—and eventual inversion—of the ERP.
The first chart illustrates the S&P 500 trailing twelve-month (LTM) earnings yield plotted against both the 10-year and 30-year Treasury yields since 2006, highlighting the growing convergence between equity and bond yields. The second chart shows the resulting ERP, measured as the spread between the earnings yield and each Treasury maturity, with long-term average levels denoted by the black lines. Notably, the ERP versus the 30-year Treasury yield turned negative in early 2025 and has continued to deteriorate, currently registering approximately -1.5%, well below its long-term average of roughly 2.2%. A negative ERP implies that equities are offering less yield than long-term Treasuries, signaling a diminished risk premium and raising questions about the relative attractiveness of equities at current valuation levels.
So, does this mean it’s time to reduce equity exposure? Not necessarily.
The Percent Positive for the S&P 500 (^PTSPX) currently sits at 56% after reversing down this week, indicating that a majority of stocks still exhibit positive long-term trends. This supports the view that, despite macro headwinds, underlying market breadth—and the broader uptrend—remains intact. Importantly, indicators like Percent Positive adapt in real time. If conditions weaken, this will show up through declining breadth and a move below key thresholds—providing a clearer signal to reassess exposure rather than acting prematurely.
