Nvidia hit a record on Monday, edging toward a $6 trillion market value. The Nasdaq closed at a record. The S&P 500 finished at 7,818.93, within about half a percent of its all-time high, according to FinancialJuice. On the other side of the market, the 30-year Treasury yield reached 5.70% and the 10-year touched 5.34%, which Investrade called the highest since 2002. Deutsche Bank dates the 10-year peak to 2007, but both describe a multi-decade high.

Deutsche Bank has a blunt view of this picture: both cannot be right.

Two Markets, Two Stories

In a note summarized by investingLive, Deutsche Bank argues that bonds are signaling a new macro regime of multi-decade-high yields, faster rate hikes and oil above $100 a barrel. Equities, credit and the VIX volatility index, it says, show little sign of stress. In the bank's words as relayed, bonds have priced the warning while risk assets have not priced the consequences.

The VIX was near 15 on Monday, per Yahoo Finance. Euro investment-grade credit spreads ended last week around 100 basis points, far from crisis territory.

What the Bond Market Is Saying

The message is not only about the United States. Blogerroom reported less than two weeks ago that a weak Treasury auction pushed yields to near 20-year highs, and nothing since has reversed that. ISM services prices paid hit 74.0 on Monday, the highest since July 2022, which feeds fears that inflation is not fading, according to Investrade. Markets price about a 25% chance of an October Fed hike and a full quarter-point increase by December.

Europe is under more strain. Deutsche Bank noted that the gap between French and German 10-year yields widened by 32 basis points last week, the largest weekly rise in Bloomberg data back to 1990, and that Italy's spread widened by 23. France's 10-year yield approached 5%, a level not seen since July 2002, Euronews reported. Political paralysis ahead of next year's election is the trigger, Gianluca Benigno of the University of Lausanne told Axios.

Why Stocks Shrugged

The equity case is not hollow. Nvidia hit a record on Monday, lifting its market value to about $5.7 trillion on a $150 billion buyback expansion and a Morgan Stanley top-pick call, investingLive reported. Its revenue roughly doubled in its latest quarter. Even so, the shares are up about 28% this year, lagging a roughly 96% surge in the wider chip sector.

That is an earnings story, and a strong one. The risk is that it carries the whole index. The longer stocks stay near records while yields stay elevated, Deutsche Bank says, the more exposed the largest growth stocks become, because higher real yields weigh most on companies whose value depends on distant profits.

How This Usually Ends

Deutsche Bank's reasoning rests on history. During the euro-area debt crisis of 2011 and 2012, the pandemic shock in March 2020 and the selloff of 2022, trouble in government bond markets came with serious weakness in European equities. This time the STOXX 600 fell just over 1% last week and sits within 4% of its record, which a Deutsche Bank analyst described as highly unusual given the scale of the bond move.

The bank sees two exits. One is a quick calming, as after the Silicon Valley Bank collapse in March 2023. The other is that equities and credit have to catch up with the bond market. In a risk-off move, it expects the dollar to gain and the euro and high-beta currencies to suffer. EUR/USD was near 1.1218 on Tuesday, close to a 17-month low, NordFX reported.

My view: the burden of proof sits with equities. A risk-free 5.3% yield raises the hurdle for every dollar of future earnings, and a 25% chance of an October hike means rates are not done rising. Strong AI earnings can offset that for a while, but not indefinitely.

Europe's Political Fuse

The European data already looks fragile. Eurozone inflation reached 3.8% in September, as Blogerroom covered in its report on energy-driven inflation, and the ECB faces a hike on Oct. 29. Add politics. France's parliament starts debating the budget on Oct. 13, Euronews said, and Spain's Prime Minister Pedro Sánchez called a snap election on Monday, according to STL.News.

Blogerroom's earlier report on the Nasdaq's record on chip strength shows how long the equity rally has run. The bond market's message has been building for weeks.

What to Watch

Oil is the wildcard. Deutsche Bank notes bonds price crude above $100 while oil futures still assume normalization next year. Aramco's chief executive warned this week that rebuilding global oil inventories could take two years after the Strait of Hormuz reopens, with less than 10% of stocks practically available, according to investingLive. If that is right, a fresh supply shock would hit a market with no cushion.

Next come the Fed's meeting minutes, French budget votes and the start of earnings season. Stock indexes can ignore bonds for weeks. They have rarely ignored them for years.

This article is general information, not financial advice.