US 10-Year Treasury Yield Surges... Volatility Warning Grows [Asset Bubble Alert]

Impact of Additional Stimulus Expectations... "Warning Lights Will Brighten if Continued"
Corporate Damage Inevitable, Negative Stock Impact... Atlanta Fed President Signals Tightening

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As U.S. long-term Treasury yields have surged sharply since the beginning of the new year, warning messages are emerging that market volatility could increase further. There are concerns that the sudden jump in yields, driven not by economic recovery but by expectations of additional stimulus measures, could shake the stock market, which had been on an upward trend.

According to Bloomberg and other sources on the 11th (local time), the yield on the U.S. 10-year Treasury note closed at 1.146%, up 2.78% from the previous trading day. It has risen 23 basis points (1bp=0.01 percentage point) since the start of the year. The U.S. 10-year Treasury yield plunged in March last year amid the spread of COVID-19 and has fluctuated since, but has surged sharply this year.

The U.S. 10-year Treasury serves as a global benchmark for long-term market interest rates. In the U.S., it is linked to mortgage and auto loan rates and is effectively recognized as the country's lending rate. Generally, a gradual rise in this Treasury yield is interpreted as an optimistic signal of economic recovery. The recent rise in U.S. long-term Treasury yields is analyzed to be due to expectations of additional stimulus measures following the Blue Wave (Democrats controlling the White House and both houses of Congress).

The problem lies in the speed of the rise in Treasury yields. Considering that the 10-year Treasury yield reached the 3% range in 2018, the current low 1% range is relatively low. However, experts analyze that the recent sharp rise could be an abnormal signal. Mohamed El-Erian, Chief Economic Advisor at Allianz, said regarding the rise in long-term Treasury yields, "It is not due to economic growth but concerns about inflation," adding, "If this situation continues and the yield rises another 20 basis points within the next 5 to 6 trading days, the yellow light (warning signal) will shine brighter."

In particular, damage to companies is inevitable. When the cost, i.e., interest rates, rises, the future earnings value of companies is evaluated lower, which becomes a factor that lowers stock prices. Morgan Stanley warned in an investment report that as corporate earnings are affected, "high interest rates could become a wild card and mark the beginning of a stock market downturn." Julian Emanuel, Head of Equity and Derivatives Strategy at securities firm BTIG, emphasized, "The higher the interest rates rise, the more high price-to-earnings (PE) ratio stocks may face headwinds," and urged to "prepare for greater volatility."

As U.S. Treasury yields rise, the U.S. dollar has turned stronger, and the won-dollar exchange rate is under upward pressure. On the morning of the 12th, the dollar index rose to 90.46, and the won-dollar exchange rate is attempting to recover to the 1,100 won level.

The Federal Reserve (Fed) has even signaled that tightening could begin as early as the end of this year. Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said he is open to the idea of tapering (gradual reduction of easing policies) this year, based on a strong economic recovery outlook. He also mentioned the possibility of interest rate hikes as early as the second half of next year if the economic recovery is rapid.

This content was produced with the assistance of AI translation services.