Rising US treasury yields not to be feared! HSBC reassures: Strong corporate profits and low market positions will support stock market gains.

Against the backdrop of the energy shock triggered by the conflicts in the Middle East, exacerbated inflation pressure, and the suppression of market expectations for the Fed to ease its monetary policy, US bond yields have risen rapidly. As of the time of writing, the ten-year US Treasury bond yield, known as the "anchor of global asset pricing," is approaching 4.5%, at 4.481%. As the "anchor of global asset pricing," the ten-year US Treasury bond yield profoundly affects the global borrowing costs for mortgages, corporate loans, and sovereign debt. In addition to impacting borrowing costs (eroding corporate profit margins), the rise in US bond yields could also trigger a rotation of funds from the stock market to the bond market, casting a shadow over the currently strong global stock market outlook. However, according to Max Caitlin, Chief Multi-Asset Strategist at HSBC Holdings, despite the continuous rise in bond yields, the stock market still has room for further gains due to strong corporate profit recovery and low market positions. Caitlin stated that he currently holds an "extremely bullish" position on stocks. He pointed out that corporate profits have shown a V-shaped recovery and are "rising further on a high base." He added that the performance of this earnings season is "crazy, just crazy," with about 87% of companies exceeding market expectations, comparable to the period when the economy reopened after the pandemic. At the same time, Caitlin believes that stock valuations have not reached bubble levels yet. He noted that overall investor positions are still low, and whether it's systematic funds or actively managed funds, fund flows are "still far from signaling a sell-off." Caitlin believes that the current US bond yield levels do not pose a threat. However, he also admitted that if the Fed raises interest rates more than once, the market may find it challenging to endure. He stated that the main interest rate risk comes from stronger-than-expected economic growth. Caitlin also mentioned that the current stock market rally is "almost a global phenomenon outside of Europe." He believes that Europe is particularly vulnerable to the effects of the Middle East conflict, as it relies heavily on the reopening of the Strait of Hormuz but lacks the positive drivers brought by technology and artificial intelligence (AI). On the other hand, Caitlin pointed out that US consumer data is strong, including credit card spending and weekly retail sales data, reflecting the stable fundamentals of the US economy. Regarding the Asian markets, he specifically mentioned that the South Korean stock market remains attractive, despite the Kospi index rising by 86% so far this year due to the AI boom. He stated, "The positions in the Korean market are actually not heavy," and the valuations of major Korean indices are still at reasonable levels. Policy expectations make a U-turn, the "anchor of global asset pricing" swings dramatically The sharp changes in oil prices and inflation environment have forced the market to witness a historic reversal in pricing the Fed's policy path. Just before the outbreak of the Middle East war in February, overnight index swap markets showed that traders generally expected the Fed to cut interest rates by about 50 basis points for the full year in 2026. However, the energy shock triggered by the war has completely shifted the interest rate outlook. Currently, interest rate swap contracts tied to the Fed's rate decisions show that the probability of the Fed raising rates by April next year has exceeded 50%, while the expectations of rate cuts have been further postponed. The CME Group's "Fed Watch" tool shows that the probability of at least a 25 basis point rate hike in December has increased to about 32%, and pricing has virtually ruled out the possibility of rate cuts from now until the end of 2027. Naokazu Koshimizu, Senior Interest Rate Strategist at Nomura Securities, commented on this: "There is a strong trend of positioning adjustments in the market. The outlook has become highly uncertain, not only in terms of how much rate cuts may be delayed, but also whether the next step will be a rate hike. Until now, the market has always believed that rate cuts would come at some point, which has supported buying behavior." This rapid reversal in expectations is also reflected in the internal divisions of the Fed. The Federal Open Market Committee (FOMC) meeting last month saw the highest level of dissent since 1992, with as many as three officials voting against releasing a dovish policy statement. Even Milan, who was previously the most dovish member of the Fed's Board of Governors, has significantly softened his stance, drastically lowering his rate cut expectations. The upcoming new Fed Chair, Powell, has also attracted widespread attention from the market, with expectations that his appointment will face extremely difficult policy choices. Looking at market dynamics, yields on bonds of various maturities have soared across the board. In addition to the ten-year US Treasury bond yield approaching 4.5%, the 30-year bond yield has exceeded 5%, becoming the first long-term bond to break through the psychological barrier of 5%. The five-year bond yield has further stabilized above 4%, and the two-year bond yield has risen to 4%. The ten-year US Treasury bond yield approaching 4.5%! Fierce debate on Wall Street As the ten-year US Treasury bond yield hovers around the "psychological life-or-death line" of 4.5%, Wall Street is embroiled in the most intense debate in nearly two decades. On one side are the "new hawks" who firmly believe that inflation has structurally gotten out of control and yields will inevitably surge towards 5%; on the other side are the "bottom-fishers" who think high yields are on their last legs and the bond market is entering a golden pit. The outcome of this debate will directly determine the direction of the global asset pricing anchor. Hawks' warning: 5% may not be the end, inflation has entered an "unfavorable scenario" The bearish camp, represented by Steven Barrow, Chief Strategist at Standard Bank, believes that the current upward trend in yields is not a short-term fluctuation but a fundamental reshaping of global macro logic. Their core logic is built on the tripod of "war + policy + structure". First, the impact of the conflict in the Middle East on the global energy supply chain is no longer a temporary shock but has become a long-term cost premium. When energy prices linger at high levels for over 18 months, inflation pressure will inevitably spread from fuels to the service and wage sectors. Secondly, the Fed's slow pace of rate cuts at the beginning of 2026, interpreted by the hawks as a compromise on inflation expectations, could lead to the loss of anchoring of inflation expectations due to this "soft monetary policy". The deeper reason lies in the return of structural inflation. From the green costs caused by climate change to the tightened immigration policies restricting labor supply to the fragmentation of global supply chains, these factors together create a "high inflation, high interest rates, high volatility" new normal. In the eyes of the hawks, the ten-year US Treasury bond yield touching 5% is merely a return to the pre-2007 norm rather than an extreme anomaly. ING pointed out on May 12 in its analysis, "The 4.5% ten-year US Treasury bond yield is in sight." Once it reaches this level, it will attract many structural buyers. However, this yield can also easily continue to rise, especially if the pricing pressure shows no sign of easing. The bank warned that if the war persists, inflation could rise to 5%, and the Fed will be unable to cut rates in this environment. In its latest brief in May, JPMorgan warned that the "inflation bottom has been lifted." They believe that the 60/40 stock/bond allocation is facing challenges, as the stickiness of inflation (especially after the energy shock) could lead to further bond price declines. Bulls steadfastness: high yields are righteous, and 4.5% is the red line for the stock market Meanwhile, the bull camp has fortified a solid defense line at the 4.5% level. Juxin Wealth Management and some asset management institutions believe that the US bond market is oversold, and the current yield levels already offer extremely high value in terms of allocation. Analysts bullish on the bond market believe that while inflation data may be hot, there is a limit to consumers' resilience in the US. High borrowing costs have begun to suppress the expansion of real estate and manufacturing, and the slowing economic growth will eventually act as an "automatic brake" to curb yield spikes. For long-term investors, locking in a risk-free return rate of over 4.5% will be an excellent hedge tool in future recession cycles. In addition, the bulls are banking on a "technological miracle." Although senior strategists like Barrow remain skeptical, some analysts from institutions like JPMorgan still believe that the enhancement of productivity by artificial intelligence will begin to show in the second half of 2026, offsetting energy inflation by reducing production costs and thus opening up room for the Fed to cut rates. Paul Shiki of Bespoke Investment Group may have summed up the subtle sentiment of the current market in March: if we see 4.5% by the end of the year, that won't be so worrying; but if we break through 4.5% in a month or two, that will be a big problem. And now, this "big problem" seems to be looming - the ten-year US Treasury bond yield is just a step away from the 4.5% threshold, while the 30-year bond yield has already broken through the 5% mark. The market is at a crucial juncture. Bears hold the trump cards of energy shocks and fiscal deterioration, while bulls hope for a slowdown in growth and central bank shift. Whichever side ultimately prevails, once the 4.5% psychological barrier is substantially breached, it will redefine the benchmark for global asset pricing.