Global equity markets have continued their powerful 2026 rally, with investors largely brushing aside geopolitical tensions and inflation concerns. Major stock indexes have rebounded strongly despite the ongoing U.S.-Iran conflict, signaling sustained optimism across risk assets.
However, bond markets are telling a far more cautious story.
While equities recovered most of their early war-related losses, government bond yields have surged worldwide, reflecting growing fears around persistent inflation and the possibility of further interest rate hikes. Rising yields typically indicate falling bond prices and increasing investor concern over macroeconomic risks.
In the U.S., the S&P 500 has gained roughly 7.4% year-to-date and climbed nearly 7% since the conflict escalated in late February. Both the S&P 500 and the Nasdaq Composite reached fresh record highs last week before easing back as Treasury yields moved higher.
The bond market, meanwhile, has remained far less optimistic. The yield on the benchmark U.S. 10-year Treasury has jumped nearly 70 basis points during the conflict, highlighting mounting pressure in fixed-income markets.
A similar pattern has emerged globally. The MSCI World ex USA Index has recovered significantly from its wartime lows and now sits only modestly below pre-conflict levels after once dropping nearly 9%. In contrast, the FTSE World Government Bond Index has recorded a sharp rise in aggregate yields, reflecting continued stress across sovereign debt markets.
Despite these warning signs, investor appetite for stocks remains strong. According to Bank of America’s latest fund manager survey, global equity allocations saw a record increase in May, with managers shifting from a net 13% overweight position in April to a net 50% overweight stance this month.
Still, BofA analysts cautioned that markets may be approaching a potential “sell signal,” warning that early June could become vulnerable to profit-taking as rising bond yields continue to test the strength of the equity rally.
