Citi has warned that renewed selling in US Treasuries poses a growing risk to global equity markets, with valuations likely to come under pressure if yields continue to rise.
In its latest global equity strategy update, the bank highlights government borrowing concerns and instability in the US budget process as key drivers behind recent moves in the bond market.
The shift in the rates narrative remains a central risk for equities. Volatility in bond yields, especially US Treasuries, has already been linked to equity market setbacks earlier this year.
The concern now is that any further deterioration in demand for US debt, particularly from foreign buyers, could trigger a fresh wave of selling.
Citi sees valuations as the main way rising yields affect equities. Higher yields reduce the present value of future earnings, compressing price-to-earnings multiples.
While that relationship still holds, the bank notes its effect is weakening. Equity valuations appear stretched relative to current yields, but not yet euphoric.
The equity risk premium, which reflects the excess return investors expect from equities over government bonds, has widened since the start of the year. Citi believes this provides a margin of safety.
Should yields stabilise, the risk premium could narrow, easing pressure on valuations.
Even so, the risks are clear. With US fiscal dynamics unresolved and policy uncertainty still elevated, Citi argues that equity markets are far from immune to further turbulence in bonds.