Investors have enjoyed a surprisingly good year in stocks. Equity markets are up double digits even as interest rates stayed higher than anyone expected.
Richard Saldanha, who runs global equities at Aviva Investors, thinks there is one number that could change all of that: 5%. If the US 10-year Treasury yield hits that level, he says stocks start entering what he calls "pain territory."
The 10-year Treasury yield is the foundation for borrowing costs across the economy. When it moves, everything else moves with it. On Monday morning, it sat at about 4.7%, which means 5% is not a distant fantasy. It's right around the corner.
"Make no mistake, rates do matter, and I think as you start to see that 10-year push to 5%, I would suggest that starts to become more of a pressure point," Saldanha said in a Bloomberg Television interview.
That pressure point is exactly what he's worried about. Stocks have shown they can handle higher yields, but 5% is where the math changes. He did not predict a crash, but he made it clear that the easy gains could get much harder.
The Treasury Department did try to help last week. It surprised traders by announcing plans to buy back more debt, officially to help older securities trade easily, but most observers took it as an attempt to push yields back down. That move briefly calmed the selloff that had pushed long-term yields to multi-year highs.
Saldanha's answer is not to run for the exits. It's to spread out.
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He thinks the concentrated bet on AI stocks is getting risky, which is not a popular take right now. He does not deny the momentum, but he points out that semiconductor stocks have tricky supply and demand dynamics.
"There are ways you can even think about diversifying even within the tech complex," he said.
That means looking at Chinese hyperscalers, the massive cloud and data companies that actually outperformed their Western rivals during the semiconductor selloff in June and July. It also means healthcare and consumer staples, which are less flashy but steadier.
He pointed to Unilever Plc as a European defensive pick. For a fund manager who runs a worldwide strategy, that pick makes sense. Unilever sells soap and food, things people need even when bond yields spike.
Japan is another place he likes. He says the country has seen a big rise in buybacks, where companies buy their own stock, plus early signs of merger activity. That is a shift from how Japan has traditionally operated, and it makes the market more interesting.
The 5% warning is not coming from nowhere. Global capital expenditure plans are still strong, but data center builds usually get paid for with operating cash. If companies need to borrow more at higher rates, those plans could get squeezed.
That squeeze is exactly why Saldanha says it is time to think beyond the concentrated AI trade. The group of stocks that have carried the market for the past year could hit a wall if borrowing gets more expensive.
The market sentiment is also fragile. Oil prices are up, inflation risks are still around, and the Jackson Hole central bank meeting this week could shake things up. The bond market has already been jumpy, and Saldanha says it is worth watching how that volatility plays out.
The takeaway here is not that you should sell everything and hide in cash. It is that concentration has a cost. If you have been riding one hot sector, the ride could get bumpier at 5%.
The argument for spreading out is not about fear. It is about not having all your money in a single trade that is already crowded. Healthcare, consumer staples, and Japanese stocks are not glamorous, but they are different. They move in different patterns, and that is the point.
Saldanha is not saying the market is about to break. He is saying the conditions are right for a shift, and the investors who adjust early may be the ones who sleep better. With the 10-year yield already at 4.7%, that 5% test could come sooner than people think.
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