JPMorgan has a warning for anyone holding smaller company stocks. Government debt is driving long-term bond yields higher, and smaller stocks could pay the price.

The bank put a number on it. Only 9% of US small and mid-sized company stocks now pay dividends above a 30-year Treasury bond. Two years ago, it was 19%.

Here is the twist. The same note named two stocks the bank wants to own.

Why Government Debt Is Pushing Bond Yields Higher

A dividend is the cash a company hands to its shareholders. A 30-year Treasury is a loan to the US government that pays a fixed return for three decades.

When the safe bond pays more, the riskier stock looks less attractive. JPMorgan strategists led by Eduardo Lecubarri said that share is now at a 24-year low.

Their explanation is debt. About 60% of the world economy now sits in countries owing more than a year’s output while still running budget deficits. The strategists called it a first in history.

Investors “seem to be ignoring” the risk, they wrote, warning of “nasty surprises.”

On Wednesday, the 30-year yield hit 5.70%, a 24-year high. As of this writing, it stood just shy of that peak.

10 and 30-year US Treasury Yields. Source: Trad i ngView

The Russell 2000, an index of about 2,000 smaller US firms, fell 1.31% that day. The S&P 500 slipped just 0.22%, closing data shows.

The 2 Stocks JPMorgan Picked Anyway

JPMorgan screened smaller companies worldwide for dividends that beat their home country’s 30-year bond. It added two to its model portfolio, a sample list of favored holdings.

One is Dashenlin Pharmaceutical, a $3 billion Chinese pharmacy chain.

The other is Befesa, a €1.4 billion German-listed firm that recycles steel industry waste.

Both are rated Overweight, meaning JPMorgan expects them to beat their peers.

The strategists said today’s dividend share resembles the 1990s, when long yields were falling.

“These are not the 1990s,” they wrote.

Not everyone sees danger. Jim Bianco, a longtime bond bear, has turned bullish on bonds, calling 5% yields fair value.

Federal Reserve minutes released Wednesday showed most officials backing another 2026 rate hike. The Fed’s next decision lands October 27 to 28.

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