While Wall Street is laser-focused on whether Treasury yields decisively break the 5% mark — a level already breached by 30-year bonds and often viewed as ominous for stocks — Goldman Sachs is pushing back on the panic.

In a research note released Wednesday, Goldman Sachs challenged the widely accepted view that 5% nominal yields on U.S. Treasuries represent a breaking point for equities.

“Many investors point to 5% nominal yields as a key tipping point for stocks, but we are less convinced,” a Goldman Investment Research report stated.

Yields on U.S. government bonds have surged since April, driven by rising inflation expectations, the Federal Reserve’s reluctance to cut interest rates, a Moody's downgrade, a reduced appetite from foreign buyers and a renewed wave of fiscal spending that raises debt concerns in Washington.

The 30-year Treasury yield now exceeds 4.9%, while the 10-year sits at 4.4%. The iShares 20+ Year Treasury Bond ETF TLT has declined by 2% year-to-date, marking its fifth consecutive year of losses.

Global demand for Treasuries is shifting. “Non-U.S. investors, particularly from Europe and Japan, are increasingly disincentivized to own U.S. Treasuries on a currency-hedged basis due to rising home-market yields and high hedging costs,” said in an emailed comment Lawrence Gillum, chief fixed income strategist at LPL Financial.

What's So Special About 5%?

According to Goldman Sachs, the fear surrounding a 5% Treasury yield stems from its perceived parity with the S&P 500 earnings yield, also near 5%.

In theory, if investors can get a "risk-free" 5% return from bonds, why hold riskier stocks?

Goldman, however, calls this thinking misguided.

Their historical analysis found no consistent correlation between nominal Treasury yields and S&P 500 returns.

Since 1940, median annual total equity returns — including dividends — remained strong even when yields were sky-high.

When 10-year Treasury yields were between 5% and 6%, equity returns averaged 16%. When yields ranged from 6% to 7%, stocks delivered 19%. Even at yields above 8%, returns remained at 19%.

Why Real Yields Matter More

Goldman says the more relevant comparison is between the real, inflation-adjusted yield on Treasuries and the nominal earnings yield on stocks.

The S&P 500 earnings yield currently exceeds the real 10-year Treasury yield by 260 basis points, making equities still relatively attractive.

“Because equities are tied to nominal earnings, we believe the inflation-adjusted real Treasury yield is a more appropriate comparator,” Goldman said.

Higher Yields May Stick Around

Looking ahead, George Cole, Goldman Sachs’ rates strategist, doesn't expect yields to decline meaningfully in the near term.

“Markets remain in a familiar place of medium-term uncertainty,” Cole said in a note. “We still struggle to find compelling reasons to be outright bullish on the long-end.”

He highlighted a mix of structural factors — including weak hedge demand, growing fiscal deficits and shifting foreign appetite for U.S. debt—could keep yields elevated.

One recent risk is Section 899 of the House fiscal bill, which proposes taxing entities in countries with so-called "unfair" tax regimes.

This, Cole said, could further discourage foreign interest in Treasuries, forcing the U.S. to offer higher yields to attract buyers.

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