--- title: "Conditions are ripe for a market 'accident,' but surging bond yields alone won't cause it, concedes pessimistic strategist" type: "News" locale: "en" url: "https://longbridge.com/en/news/296505111.md" description: "SocGen strategist Albert Edwards warns that rising bond yields make equity markets vulnerable to bad news, though he concedes yields alone won't trigger a crash. He cites high U.S. deficits, AI capital spending crowding markets, and lack of Fed guidance as factors. Potential triggers for an 'accident' include a Chinese economic slowdown, peak earnings optimism reminiscent of 1987, and hedge fund leverage in Treasury bonds amplifying volatility." datetime: "2026-08-20T14:14:00.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/296505111.md) - [en](https://longbridge.com/en/news/296505111.md) - [zh-HK](https://longbridge.com/zh-HK/news/296505111.md) generator: "portal-rs" --- # Conditions are ripe for a market 'accident,' but surging bond yields alone won't cause it, concedes pessimistic strategist By Jules Rimmer The rise in bond yields renders markets more vulnerable to bad news, observes the 'permabear' Albert Edwards of Société Générale SocGen global strategist Albert Edwards is well-known for his bearish views on markets. Recent developments in global bond markets, where rising yields and increasing term premium (the extra return investors demand for longer-maturity assets), have prompted him to consider what might bring about an end to the artificial-intelligence-driven bull market in stocks. Albert Edwards is well-known for his bearish outlook on stock markets. Mounting yields alone won't do it, Edwards argues, but they do "leave equity investors increasingly vulnerable to bad news such as a downturn in heady profits optimism." Edwards explains his renewed concern about markets in a note to clients dispatched Thursday. While the note acknowledges that the recent uptick in bond yields owes much to the breakdown in U.S. negotiations with Iran over the Strait of Hormuz, it also cites several other factors, chiefly the "obscenely high U.S. budget deficit," a surge in capital spending on AI that's crowding the capital markets and the fact that Kevin Warsh is now declining to provide credit markets with forward guidance on Fed policy. Edwards himself has been arguing for some time that the inexorable rise in Japanese government bond yields, with the 10-year yield BX:TMBMKJP-10Y almost touching 3% last week, is the principal reason for the rise in global long-bond yields. As yet, Edwards observes, "the AI-driven equity boom seems to have taken on a life of its own - seemingly impervious to shocks." Outside of postrecessionary periods, analyst optimism toward earnings has been this high only back in 1987. But the problem Edwards anticipates is that, while stretched equity valuations themselves may not trigger a bear market, they render markets highly susceptible to bad news. Edwards goes on to suggest what some of those bad-news events might be. First is an economic slowdown in China. Ten-year bond yields there BX:AMBMKRM-10Y dropped to a 13-month low of 1.69% this week as a housing crisis deepens. Peak earnings optimism is another potential source of uncertainty. Edwards's chart above demonstrates that, other than in the immediate aftermath of recessions, analyst optimism about earnings was only ever as high as this summer back in 1987. What Edwards refers to as fixed-income plumbing is also a worry. He notes that hedge funds now own 8.5% of all U.S. Treasury bonds - more than the Saudis, the Chinese and the Japanese combined. Normally a potential reluctance among those three sovereigns to buy U.S. Treasurys is considered a major vulnerability. Hedge funds are not long-term investors, either, Edwards says, and they deploy a lot of leverage, which can amplify moves and increase volatility. The percentage of Treasury bonds owned by hedge funds, and their propensity to use leverage for the basis trade, is a potential vulnerability for credit markets. One area of particular weakness could be a fondness among hedge funds to, for example, put on the basis trade, a strategy that involves buying Treasury bonds and simultaneously shorting futures on those bonds and exploiting minor price differences between the two. Brett Arends: Want to bet on the bond rally? Check out these overlooked funds. -Jules Rimmer This content was created by MarketWatch, which is operated by Dow Jones & Co. 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