Intro
Jared Woodard, who runs the research investment committee at Bank of America, tells Barron's Streetwise what level of Treasury yields would actually threaten stocks, why he thinks long government bonds have stopped working as a diversifier, and what he would put in the 40 instead. Jack Hough opens with a long history of the two previous times the 10-year yield crossed 5% and what the federal deficit looked like each time.
Guest: Jared Woodard, head of the research investment committee at Bank of America
Host: Jack Hough
Also on: Emily Sumlin, the show's audio producer
Published: 28 August 2026 on Barron's Streetwise
Show notes | 31 min
Key Takeaways
Five percent is the warning shot, seven is the level that does damage
"I think five is your warning shot and seven is the one that really hurts" — Jared Woodard
Japan's equity peak came as government bond yields reached about seven
Long government bonds are the broken half of the portfolio, not the safe half
"20-plus-year Treasury bond ETF is down 40% since the summer of COVID" — Jared Woodard
Both of the plausible macro outcomes break the conventional 60/40
Higher growth with some inflation, or inflation without growth — Woodard says the model does badly in each
The three routes from higher yields to lower stock prices are all open, and none is flashing yet
Absolute valuation, relative valuation against bond yields, and the cost of capital for companies
Woodard's replacement for the 40 starts with the fixed income nobody owns
Emerging market debt, high yield and fallen angel corporates, senior loans, CLO ETFs
Fallen angels win because of who is allowed to own them
"A big change in your yield because of who can own you." — Jared Woodard
He says triple-C yields look eye-popping but the default rates make them not worth it
Swapping the 40 into commodities beat doing it with bonds, by his numbers
"you would've averaged an extra percentage point of return every year than what you would've had doing it with bonds" — Jared Woodard
The summer's money moved into things with nothing to do with AI
Regional banks, insurance and pharmaceuticals, especially biotech
Productivity booms have often paid consumers rather than the people who financed them
Railroads, fiber optic cable, shale and urban electricity all raised productivity
Hough's history: the 1966 crossing of 5% had no happy ending, and ran for fifteen years
Stock investors lost money between 1966 and 1981
Goldman Sachs found almost no relationship between the level of yields and stock returns
Great returns happened at 2 to 3% and again above 8%
What Kind of Person a Vigilante Is
Hough opens the episode by asking producer Emily Sumlin what she pictures when she hears the word vigilante, a hero or a villain
"Tragically misunderstood, but morally gray." — Emily Sumlin, which Hough calls close to the best case for the word
He works through the range: Dexter, the serial killer who killed other serial killers and who the audience half rooted for, and Two-Face from Batman as the straight villain
On his own brush with a vigilante: a neighbor called the town on Hough a few years ago for cutting down a large rotted tree without a permit, and Sumlin does not let him claim the innocent side of it
"I was trying to save people from a falling tree, I swear." — Jack Hough
"For the good of the people, but still unsanctioned." — Emily Sumlin, on who the actual vigilante was
The one clean case he offers is a Montreal Gazette story about a landscaper repairing potholes on public roads in his spare time: "this man was putting his asphalt on the line, and I say that's a straight-up hero"
The Setup: Yields Are Rising and 5% Is the Number People Name
The move Hough is describing: "This year, the yield on the 10-year Treasury is up a half point to 4.7%. That's a big move. The 30-year Treasury has been rising too. It recently went above 5.3%, the highest level in nearly two decades."
The explanation he keeps hearing is bond vigilantes punishing politicians over runaway deficits, and his question is whether stock investors get caught in the crossfire
"There is some anecdotal evidence for the 5% theory." — Jack Hough, who then works through the only two modern instances
The 2023 instance: the 10-year climbed a full point in the back half of the year to top 5% for the first time since 2007, and stocks protested
"The S&P 500 that year fell 10.3% from its July high to its October low." — Jack Hough, who notes it barely met the usual definition of a correction
"They were still up more than 190% over the past decade." — Jack Hough, on how much of a hardship it really was
The yield reversed almost immediately and "the S&P 500 shot over 15% higher between November and December 2023"
Hough's aside on the coincidence: Succession on HBO and Billions on Showtime were both airing their final seasons that year, which looked like foreshadowing for the wealthy that never arrived
The 1966 Crossing, Where the Market Did Not Bounce Back
The other instance is the one nobody cites: the 10-year last crossed 5% before that in 1966, under Lyndon Johnson
Hough explains Guns and Butter as the trade-off between a military build-up and social programs, except that Johnson ran both — Vietnam and the Great Society — and did it without initially raising taxes
The result was not a dip and a recovery: inflation raged for more than a decade, the 10-year eventually reached double-digit yields, and stock investors lost money between 1966 and 1981
He dates the era by its television: Taxi, where everyone was driving cabs and picking up second jobs, All in the Family with Archie Bunker worried about losing his factory job, and One Day at a Time with a divorced mother supporting two daughters
The point of the pairing with Succession and Billions is that the mood on screen tracked which of the two 5% episodes investors were living through
Guns and Butter Then, Entitlements and Interest Now
Hough stops to define the terms: "the debt is the amount of money we owe. The deficit is the yearly amount by which we're going further into the hole", because he hears the two used interchangeably
The deficit comparison: "Back in that era in the mid-1960s, that was ranging from a half percent to 1.8% of gross domestic product. Now we're closer to 6%."
By his arithmetic "it's more than three times the extra borrowing today, even as a percentage of the economy"
The debt comparison: back then it was about 40% of the economy, and "The national debt today is larger than the economy."
"You might have heard that the national debt just recently topped $40 trillion." — Jack Hough, who adds that a trillion sounds like a billion and that this is, from a certified multi-decade handler of stories about very large numbers, a very large number
The difference he thinks matters most is what the money buys: the 1960s spending was discretionary, the Vietnam War and the Great Society, and whatever you think of it, it was a choice — today much of it goes to Social Security, Medicare and interest
Goldman's Chart: The Level of Yields Explains Almost Nothing
Hough's last piece of setup is a Goldman Sachs study from last year on exactly this question, whether 5% is the number, and the answer was not really
The bank plotted bond yield levels against stock returns since 1940 and Hough says there is no real pattern in it
Returns were great with the 10-year at two to 3%, and great again with it at six to 7% or over 8%
"Their conclusion was it's not just about the level of yields, it's about how yields are moving and how quickly they're moving and why they're moving." — Jack Hough, summarizing the study
Five Is the Warning Shot, Seven Is the One That Hurts
Woodard gives Hough a number and a second number: "I think five is your warning shot and seven is the one that really hurts"
His first precedent is Japan in the 1980s, where he puts the peak in Japanese government bond yields at 6.8% as the Nikkei's run finally ended
Yields went a little higher afterward, almost to eight in the rebounds, but "the peak in the equity market was when Japanese government bonds got to about seven"
His second is the dot-com era, which he asks people to remember alongside the productivity boom that preceded it, the expansion of computers into society, with productivity running at five to 6% and the 10-year also around seven
The mechanism he describes is not the number itself but the combination: yields visibly higher than they had been recently, at a level that starts to change what investors do
"I mean, I think that the history or the how it's happened in the past is important, but even more important is the why." — Jared Woodard
Why Long Government Bonds Stopped Doing Their Job
Asked how an investor tells which scenario they are in, Woodard reframes it as the multi-year asset allocation question his team works on: where in the whole universe of asset classes and regions to put capital
"the answer has definitely not been long-term government bonds" — Jared Woodard, and he says they have been writing that since about 2018 or 2019
"20-plus-year Treasury bond ETF is down 40% since the summer of COVID"
"Even if you were in the seven to 10-year window, I think you're down more than 10% on a total return basis."
"It's been a terrible place to be" — and he says he is not confident long government bonds will be the diversifier or the source of protection they were for the past 20 years of investing
He points out to Hough that the 1970s and 1980s were painful for bond investors just as much as for stock investors, and that the era since has been globalization, ample capital and record low rates
The Real Question: Whether the World Starts Investing in Itself
Woodard frames the decision he thinks matters most right now: whether countries around the world begin investing at home rather than sending capital to the US dollar and the US market by default
In that world you might get higher inflation, but also higher growth
He is explicit that this is not the consensus: "The majority view is, oh, if the dollar's weaker, it's because everything's terrible and inflation is going to destroy us.", back to the grimy, gritty '70s
The takeaway does not depend on which view is right: "the 60/40 conventional asset allocation model that works so well for the past 20 years would perform poorly in both scenarios"
"The thing that most people own, I think is very ill-suited" — whether you are bullish on growth, bearish on growth, or simply expecting more inflation
Three Ways Higher Yields Could Hurt Stocks, and Why None Is Flashing
Route one, absolute valuation. A stock is discounted future cash flows, so a higher discount rate lowers the valuation — but earnings are good, including for small caps
Large cap market cap weighted indexes are not cheap by anyone's measure, though Woodard argues they are higher quality than in past decades
"Some tech stocks are very speculative with cash flows way out in the distance.", but "a lot of the companies at the top of the market today are also profitable today, and they've got profits rolling in today"
Hough tests the point on the AI spenders: "The difference of an extra percentage point on their funding rate isn't going to make or break the profits they're getting from these things they invest in." Woodard's answer is one word, exactly
Route two, relative valuation — the risk that bond yields get high enough that an investor asks why take equity risk at all
Woodard says he does not find many investors who find that argument compelling today, given how government bonds have performed
If inflation is structurally a little higher than the last couple of decades, an incrementally higher bond yield is not that attractive, especially against the ability of stocks to benefit from inflation in nominal terms
Route three is the one he thinks people should watch: the economic effect of a higher cost of capital on companies
"Debt refinancing becomes harder, M&A becomes more expensive, project financing's more challenging."
The largest companies in the economy are investing at a pace they have never done before, which makes a higher cost of capital a pain point
His caveat is a stack of conditions: a Fed that hiked a bunch, longer-dated yields that kept rising, and policymakers who did nothing about it, which he says they are not
The Hamburglar Break
Coming back from the break, Hough asks Sumlin what she would be known for if she went into a life of crime with only the name "the bond vigilante" to work from
"all I can really think about is the Hamburglar" — Emily Sumlin, who says she would look and live like him
Hough approves — put a B on his chest and you have everything you need — and casts himself as Grimace, since "I practically am Grimace"
On the appeal of the character: "we don't know exactly how the Hamburglar attacks people, but that's part of the terror, the not knowing"
Sumlin tries to get Hough to name his own vigilante persona and he refuses, on the grounds that the Hamburglar answer is already perfect
Why It Matters What the Deficit Buys
Hough puts the doom loop to him: if deficits push yields up, and higher yields make the debt more expensive to finance, the problem feeds itself
Woodard agrees it is a concern but says the composition is underrated: "it does matter what you spend the money on"
For decades many countries, not only the US, have spent heavily on consumption, healthcare and education — necessary things, he says, but done poorly they do not raise future growth
His claim about today's deficits is that more of the money is going into things that could raise productivity, and he says this is by no means isolated to the United States
"Famously, some of the best technology in the world had its early life in defense spending in the United States" — or defense-related research later commercialized, and the same for medicine and early drug patents
He cites his own shop as the source of the framing: "the work from the Bank of America Research Department now going on 10 years" has been to say that investing in industrial capacity, new technology and resource security costs more upfront but that "This can also raise prospects for higher economic growth."
Prudent Yield: The Fixed Income Most Portfolios Skip
Hough's version of the ask: he can stay long-term optimistic and does not have to "sell everything and put it in canned goods and Pokemon cards", but he needs a new answer for the 40
Woodard's answer is that meaningful yield and uncorrelated returns exist without going into very long-term debt, especially government debt, which he says may or may not do what you would like it to
His team calls the framework prudent yield, and the point is sectors that are underrepresented in most benchmarks, indexes and portfolios
"emerging market debt, which most people don't know represents a quarter of all the fixed income securities in the world, but is basically zero in most people's allocations" — Jared Woodard
"high yield and fallen angel corporate bonds, which by our analysis have given you the best returns in the US corporate bond market" — and his list also names senior loans and CLO ETFs, which he grants sound complex
The second half of his answer is real assets, with commodities as the way in, and the wrapper left open — futures, ETFs or private assets
Fallen Angels, and the Best House in a Bad Neighborhood
Hough asks him to explain what a fallen angel is, having seen the phrase in ETF names
"These are bonds that used to be rated as investment grade" — Jared Woodard, on companies that hit trouble, got downgraded to high yield, and became ineligible for anyone with an investment grade mandate
The return comes from the round trip: "companies will do whatever they need to do to become, in the jargon, rising stars and then eligible for an upgrade again", and when the upgrade lands the money rushes back and prices rise
Hough walks the audience through the threshold himself: "the lowest part of it is triple-B, and when you take just one tick below that, you go into what we call the junk bond world or the high yield world", and one tick changes the yield a lot
Woodard's explanation of why one tick matters that much: "A big change in your yield because of who can own you."
Crossing the line down and then back up has, by his analysis, given the best risk-adjusted return in the US corporate bond market over many decades
On why not go further down the credit stack: "The best house in the bad neighborhood, so to speak."
Triple-C paper shows eye-popping yields, but "History shows though, given the higher default rates, it's not worth going quite that far."
Commodities in Place of the 40
Hough says he was surprised by a chart of Woodard's comparing a stocks-and-commodities portfolio with a stocks-and-bonds one, since bonds at least pay you a yield and commodities just sit there
Woodard confirms it, flagged as a thought experiment rather than a recommendation: take all the fixed income out and make the 40% commodities, so the mix is still 60/40
"you would've averaged an extra percentage point of return every year than what you would've had doing it with bonds" over the past many decades
"You multiply that over investment career, you're talking about very, very real money."
The version he prefers is not the static one: that result comes from commodity indexes that are pretty static in what they own, where the return waits for a breakout in gold, oil or soybeans
Newer products and indexes his ETF research covers are more dynamic, "so you're not owning things that just sit there, but the things that are really moving the way you want", which he says offers better potential for both returns and diversification
Where He Would Look That Has Nothing to Do With AI
Asked what he has not been asked, Woodard starts by conceding the bull case: "Look, the earnings look great. Our analysts are incredibly bullish, and who am I to say that the entire world is wrong?"
The shift he noticed this summer was money moving into "things that are a little more defensive in some cases or are cyclical and risky, but have nothing to do with artificial intelligence"
"things like regional banks, or I don't know, insurance or pharmaceuticals, especially biotech"
His reason for liking that approach now is a combination of "capex investments relative to revenues are at record highs" and productivity data that is not yet as supportive at the aggregate level as you might like, with gains that might take longer to arrive
He is careful to say this is not an argument that AI is fake: "history is full of examples of new technologies that actually raise productivity at the national level in a meaningful way, but where the gains didn't necessarily accrue entirely to the providers of capital, to the investors"
"Think about railroads or fiber optic cable or shale or even electricity in cities, they all made us more productive."
The pattern he expects to repeat: "A lot of times those investment booms were to the greatest benefit of consumers or even businesses in the aggregate rather than investors.", and the investors who do best will be the ones diversified across sources of risk and return rather than in one mega trade
Hough closes the episode by thanking Woodard, then thanking Louie De Palma and Reverend Jim from Taxi, and Sumlin adds the Hamburglar
Woodard's bottom line is that yields are nowhere near the level that would break the stock market, but the part of the portfolio investors have been told is the safe part is the part that has already broken, and the fix is to rebuild the 40 out of credit and real assets rather than long government bonds.
Products, Companies & Tools Mentioned
The 10-year and 30-year Treasury (The two yields the whole episode turns on — Hough puts the 10-year up a half point this year and the 30-year above 5.3%, and Woodard's danger levels are set against the 10-year)
20-plus-year Treasury bond ETF (Woodard's evidence that long government bonds stopped working: down 40% since the summer of COVID)
Emerging market debt, high yield and fallen angel corporate bonds, senior loans, CLO ETFs (The prudent yield list — sectors he says are underrepresented in most portfolios, with fallen angels the best risk-adjusted return in US corporate bonds by his analysis)
Commodities, including gold, oil and soybeans (His second replacement for the 40, worth roughly an extra percentage point a year in the swap, and better again in dynamic indexes than in static ones)
Goldman Sachs (Its study last year plotted yield levels against stock returns since 1940 and found no real pattern, which is Hough's answer to the 5% theory)
S&P 500 (The index in both of Hough's yield episodes — 2023's correction and the rebound that followed)
Nikkei and Japanese government bonds (Woodard's clearest precedent: the equity peak arrived as JGB yields reached about seven)
Regional banks, insurance, pharmaceuticals and biotech (Where the summer's flows went, in his telling — returns available without betting on AI)
Social Security, Medicare and interest (What the federal money goes to now, in contrast with the discretionary spending of the 1960s)
Bank of America Research Department (His own shop, and the source of the decade-long argument that investing in capacity and technology can raise growth)
Succession, Billions, Taxi, All in the Family and One Day at a Time (Hough's device for the two 5% episodes — the wealth shows aired through 2023, the struggling-worker shows through the lost decade and a half)
Books & Resources Mentioned
The Goldman Sachs study on bond yields and stock returns (Last year's work, with a chart of the relationship since 1940; its conclusion is that speed and cause matter more than level)
Bank of America's prudent yield research (Woodard's team's framework for the fixed income sectors missing from most benchmarks)
The Montreal Gazette's pothole vigilante story (An area landscaper repairing public roads in his spare time under threat of a fine — Hough's one unambiguous hero)
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