Rising US Treasury Yields Increase Inflation Pressure... "Stock Market Correction Likely"

US Treasury Yields Recover to Pre-COVID-19 Levels, Increasing Inflation Pressure
Consequently, the US Stock Market Rally May Face a Correction
Bloomberg: "Stock Market Correction Inevitable Even if Fed Maintains Low Interest Rate Policy"

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Suhwan] As U.S. Treasury yields have been rising for several months, increasing inflationary pressures, there are growing expectations of a stock market correction. Consequently, market attention is focused on the future response measures of the U.S. Federal Reserve (Fed).

On the 21st (local time), foreign media including The Wall Street Journal (WSJ) reported that the recent continued rise in Treasury yields has heightened the possibility of inflation, which could negatively impact the stock market. WSJ stated, "The rise in Treasury yields typically has a strong potential to trigger inflation," adding, "If the Fed responds by raising short-term interest rates, it could cause a downturn in the stock market."

In fact, U.S. Treasury yields have been steadily increasing since last year, raising the likelihood of inflation. On this day, the 10-year U.S. Treasury yield reached 1.36%, marking the highest level since the COVID-19 pandemic.

This rise in Treasury yields and inflation concerns have increased the pressure for a correction in the U.S. stock market, which had been on a rally reaching record highs last year. The rise in Treasury yields acts as a negative factor for risk assets like stocks. Existing stock investors are more likely to shift to the bond market, and rising debt and prices can weaken the profit margins of listed companies.

Last week, the S&P 500, a representative U.S. stock index, fell about 0.7%, reflecting these market concerns. Notably, most bank stocks, which benefit from rising interest rates, increased, indicating the market's outlook on inflation and potential rate hikes. Josh D. Brown, Chief Strategist at investment research firm BCA Research, analyzed, "The recent stock market rally is becoming increasingly irrational," and "the likelihood of a correction soon has greatly increased."

With the possibility of a market correction, it is expected that investors will also adjust their portfolios. WSJ reported, "Until now, technology-focused investments have driven the stock market, but going forward, sectors such as travel and retail, which will benefit most from the post-COVID-19 economic recovery, will emerge," adding, "Especially since these sectors are less affected by interest rate hikes, this will accelerate portfolio diversification."

Bloomberg also reported, "Sectors such as energy stocks like crude oil and raw materials like iron and copper, which benefit positively from rising prices on operating profits, will gain," noting, "Since early this month, the average stock price increase in these sectors has been 1.7 percentage points higher than other sectors, proving this point."

Amid these forecasts, attention is focused on the semiannual fiscal policy report by Fed Chair Jerome Powell, scheduled to be presented over two days starting on the 23rd in the U.S. Senate. The Fed has been credited with leading the stock market rally by dismissing inflation concerns and advocating large-scale economic stimulus measures. Depending on Powell's remarks at this week's Senate meeting, the stock market's upward trend may continue or reverse, immediately impacting the market.

Foreign media reported that even if Chair Powell reaffirms the current low-interest-rate policy, a stock market correction is inevitable. Bloomberg stated, "With growing inflation concerns, the stock market will inevitably face correction pressures," adding, "Even if the Fed maintains its current fiscal policy stance, it will not prevent a market correction but only delay its timing."

Jerome Powell, Chair of the U.S. Federal Reserve System
[Photo by Reuters Yonhap News]

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