In the view of multiple asset management giants, the increase in long-term risk-free returns will have a negative impact on other risky assets. From the perspective of asset allocation, fixed income assets and crude oil assets may benefit from the surge in US bond yields
Under the impact of factors such as the Federal Reserve's tightening expectations and US bond supply, the 10-year US bond yield recently broke through the 5% mark, reaching a new high since July 2007. As the anchor of global asset pricing, the changes in 10-year US Treasury yields have a profound impact on the direction of various global assets.
In the view of multiple asset management giants, the increase in long-term risk-free returns will have a negative impact on other risky assets, and the volatility in emerging markets may intensify. From the perspective of asset allocation, fixed income assets and crude oil assets may benefit from the increase in US bond yields.
Why are US bond yields soaring
Since mid July, the yield of US 10-year treasury bond bonds has continued to rise, hitting a 16 year high. Huang Jiacheng, the managing director of Jingshun and head of fixed income in Asia Pacific, believes that there are several reasons why the yield of US treasury bond bonds has hit new highs in succession. Firstly, the US GDP growth rate in the first half of the year was higher than expected, and the job market continued to be booming. The Federal Reserve also raised its economic growth expectations and lowered its unemployment rate expectations in its September economic forecast, forcing market participants to reconsider the Fed's interest rate cutting path. Meanwhile, higher economic growth expectations have led to an upward trend in long-term US bond yields. Secondly, although the inflation level in the United States has declined, it is still far above the Federal Reserve's control target, and core inflation is still at a relatively high level. At the same time, the recent rise in oil prices has also brought upward pressure on inflation. The lingering high inflation has led to a lack of significant downward momentum in US bond yields, and the rise in long-term inflation expectations has also pushed up long-term US bond yields. Thirdly, for most of this year, the Federal Reserve's statements have been more hawkish than the market, which has led market participants to constantly reconsider the Fed's interest rate hike route, thereby driving up US bond yields. Fourthly, the supply of long-term US bonds has significantly exceeded expectations, making it difficult for the market to absorb a large amount of US bond supply, thereby driving up US bond yields. Fifth, the downgrade of the US sovereign rating by international rating agencies has added some upward pressure on US Treasury yields in the short term. Sixth, peripheral factors. The high inflation in the UK prompted a sharp rise in the yield of UK treasury bond bonds, which affected the yield of US bonds. In addition, after the Bank of Japan announced to relax the trading range of 10-year Japanese treasury bond to 1% this year, the yield of 10-year Japanese treasury bond rose sharply, which also caused pressure on US bonds to some extent.
In the view of Zhu Chaoping, a global market strategist at Morgan Asset Management, the short-term US bond yield is mainly influenced by the market's expectation of the Federal Reserve raising interest rates. The market believes that the Federal Reserve will raise interest rates again at the end of the year and may maintain high interest rates for a longer period of time. The upward trend of long-term US bond yields is not only related to the expectation of interest rate hikes, but also takes into account the market's expectation of maintaining resilience in US economic growth. Therefore, the upward trend of long-term yields is greater than that of short-term ones, resulting in a narrower range of yield inversion.
Risk assets are impacted
How will the soaring yield of US 10-year treasury bond bonds affect global assets? Huang Jiacheng stated that the rise in long-term risk-free returns will have a negative impact on other risky assets, especially the stock market. This is mainly reflected in two aspects: firstly, a significant increase in interest rates will have a negative impact on the fundamentals of many industries, and increase the probability of the United States entering an economic recession or a significant slowdown in economic growth. The high borrowing costs have brought downward pressure on economic growth, consumption, import and export trade, etc., which is not conducive to improving the company's profitability, and thus will affect the performance of the stock market. Secondly, the increase in bond yields reduces the relative attractiveness of stock returns. The recent steepening of the yield curve has led to a gradual increase in the investment value of medium to long-term bonds. Some long-term buyers, including banks, insurance, and sovereign funds, will switch to medium to long-term bonds to lock in higher long-term yields. The risk premium in the stock market may face the risk of being repriced, especially for some growth stocks that are currently heavily traded and overvalued.
Zhu Chaoping stated that the rise in US bond yields has driven funds back into the US market, and the corresponding appreciation of the US dollar has led to short-term pressure on markets outside the US.
As the pricing benchmark for global financial assets, the rise in US bond yields will cause significant fluctuations in global capital markets. The ultra-high US bond yields will attract investors to transfer funds from the equity market to the fixed income market, and there is a downside risk in the stock market. "said Shan Kun, Director of Fixed Income Investment at Schroder Fund Management (China) Co., Ltd.
Yang Aozheng, Chief Chinese Market Analyst at FXTM, further analyzed that high US bond yields will lead to tighter global liquidity. Taking the S&P 500 index as an example, the expected annual dividend yield of the S&P 500 index in 2023 is only 1.59%. Currently, the benchmark 2-year, 5-year, and 10-year US bond yields are much higher than the stock market returns, which directly suppresses investment behavior that aims to receive stable dividend appreciation, thereby reducing the valuation of the stock market.
In addition, the high interest rates and bond yields in the United States have increased the difficulty of corporate financing and reinvestment. Coupled with tight liquidity and declining economic prosperity, corporate profits will be negatively affected, which is not conducive to the returns of US stocks, "Yang Aozheng said.
Fixed income assets or benefits from them
From the perspective of asset allocation, multiple institutions believe that with high US bond yields, fixed income products will be sought after, and crude oil assets are also worth paying attention to.
Zhu Chaoping believes that in the coming months, when the interest rate increase cycle is finally determined to end, the short-term yield may fall, prompting the yield curve of US treasury bond bonds to become steeper or the term inversion to narrow. Therefore, long-term treasury bond may obtain higher overall returns. Investors can take advantage of the opportunity of higher current yield to invest in US treasury bond bonds and high rated credit bonds, lock in higher coupon yields, and gain capital gains when yields decline.
The fiscal contraction policy in the United States and the consumption of excess savings by households are nearing its end, and the impact of high interest rates on the real economy will eventually come. At this stage, it is possible to increase investment in short-term US bonds and high-grade credit bonds in Europe and America to resist the risk of a future slowdown in the US economy, "said Shan Kun.
Yang Aozheng stated that while US bond yields remain high, the US dollar will continue to be sought after. In addition to hedging and gaining short-term upside opportunities, zero interest gold will be suppressed in the medium to long term due to maintaining high global interest rates. In terms of commodities, copper, iron ore, soybeans, wheat, etc. may continue to decline due to the strong US dollar and pressure on economic demand.
Crude oil assets are still worth paying attention to. Affected by sudden geopolitical events and the possibility of OPEC+countries extending production reduction agreements until next year, oil supply may further tighten. Although global economic growth slowdown and suppressed inflation in Europe and America are expected to suppress oil prices, supply side tightening will boost oil prices. Therefore, oil prices may remain high in the fourth quarter or hit the 100 yuan mark, "Yang Aozheng said.