Besenet's buyback struggles to alleviate pressure on long-term bonds, while US bond yields pose the biggest challenge to US stocks.

If professional investors are indeed worried that rising global bond yields might derail the stock market's bull run, their actual asset allocation decisions do not reflect such concerns. According to the latest survey from Bank of America, stocks currently make up 56% of global fund managers' portfolios, the highest level since November 2021. Although the same survey indicates that "uncontrolled rises in bond yields" are considered the second biggest risk to the stock market after concerns about the AI bubble, investors remain bullish on stocks. Optimism in the U.S. stock market is high Despite various Wall Street strategists paying close attention to the rising yields on U.S. Treasury bonds and expressing some concern, most conclude that the current increase in yields is not sufficient to disrupt the bullish logic of the stock market. After all, history shows that a sudden spike in yields is not always detrimental to the stock market. JC O'Hara, Chief Technical Strategist at Roth Capital Partners LLC, stated that despite rising yields and the stock market remaining near historical highs, "one should be bullish now, or at least seize the opportunity." He noted that risk appetite is improving, largely due to "stronger earnings expectations, better economic outlooks, and reduced focus on the Middle East situation." He pointed out that when risk appetite improves, the forward return of the S&P 500 tends to perform strongly. For those concerned about rising U.S. Treasury yields, some signs of alleviation emerged on Wednesday. In light of the recent surge in long-term U.S. Treasury yields to multi-year highs, the U.S. Treasury unexpectedly announced on Wednesday that it would increase its buyback operations for long-term Treasuries. The Treasury stated that it would at least double the scale of its "liquidity support buyback operations" for bonds maturing between 10 and 30 years. Following this announcement, yields on U.S. Treasuries across all maturities fell sharply. However, as of now, Treasury yields have already retraced all the gains made after the Treasury's announcement to support the marketon Thursday, the yield on the 30-year Treasury rose significantly by 6 basis points to 5.26%, returning to the level seen before the Treasury's announcement about bolstering long-term Treasury buybacks; the 10-year Treasury yield also increased by a similar amount. This indicates that investors believe the Treasury's measures may only have a short-term impact on curbing borrowing costs. Tyler Richey, Editor of Sevens Report Technicals, stated in an interview that the rising U.S. Treasury yields are the "elephant in the room" threatening the stock market. Matt Maley, Chief Market Strategist at Miller Tabak + Co., remarked, "Bond yields are starting to rise, and the stock market is ignoring ituntil it no longer can." U.S. Treasury yields serve as the benchmark for global borrowing costs, with increases propagating through the chain of "Treasuriesmarket ratesreal economy," while simultaneously triggering repricing within capital markets. Stock valuations essentially discount future earnings to the present using interest rates; an increase in long-term rates compresses valuations, particularly affecting high-valuation growth stocks in the U.S. Over the past year, U.S. stocks reached historic highs but struggled to maintain these levels, with persistently high Treasury yields being a significant reason. However, for other stock market analysts, the real focus should be on the U.S. Treasury yield curvethe difference between short-term and long-term U.S. Treasury yields. Currently, the yield on the 10-year Treasury is about 49 basis points higher than that on the 2-year Treasury. Ed Clissold, Chief U.S. Strategist at Ned Davis Research, wrote in a report to clients on Tuesday that the stock market is currently at the "sweet spot" of the yield curve. He described this "gently upward-sloping yield curve" as a favorable environment. In this scenario, the 10-year yield could be as much as 1.5 percentage points higher than the 2-year yield, which often provides the S&P 500 with the largest and most stable gains. According to NDR's analysis of data since 1976, the average annual return of the S&P 500 within this yield curve range is about 11%. Of course, even the current stock market bulls acknowledge that if U.S. Treasury yields continue to rise, they may eventually reach a critical point where pressure on the stock market begins. Liz Ann Sonders, Chief Investment Strategist at Schwab Center for Financial Research, stated, "I think this level is still acceptable, but if the 10-year Treasury yield approaches 5% further, it could really make the market uneasy, similar to what occurred in 2023." In 2023, amid a surge in the 10-year Treasury yield that briefly touched 5%, the S&P 500 fell by 10% from the end of July to the end of October. Institutional warnings: Treasury's increased buyback of long-term bonds may fail to curb the steepening yield curve Although the measures announced by the U.S. Treasury on Wednesday provided some relief to the recently pressured Treasury bond market, the subsequent rise in Treasury yields on Thursday underscored investors' skepticism about the effectiveness of these actions and echoed warnings from some market institutions about the potential for Treasury yields to rise again. Reports suggest that JPMorgan strategists have warned the market may consider the Treasury's unexpected actions to curb long-term funding costs as lacking credibility; over time, this could raise term premiums and yields. JPMorgan strategists, including Jay Barry, wrote in a report, "If there is no real fiscal consolidation, we worry the market will perceive this action as lacking credibility," adding, "If the Treasury becomes more opportunistic in its debt management methods and further deviates from its 'regular and predictable' principles, this could lead to higher term premiums and yields over time." JPMorgan also candidly noted that the Treasury's expanded buybacks "addresses the symptom but not the root cause." Strategists pointed out that this operation essentially only treats the symptoms of rising long-term yields and does not address the fundamental issuesspecifically, that the current U.S. economy is approaching full employment while the fiscal deficit remains about 6% of GDP, withongoing high financing demands being the core reason pressing long-term rates. The firm forecasts that the U.S. financing gap will exceed $3.5 trillion in upcoming fiscal years, and unless substantial progress is made toward fiscal consolidation, the impact of this buyback adjustment on long-term rates is likely to be only temporary. Aegon Asset Management remains firmly convinced that the gap between short- and long-term U.S. Treasury yields will continue to widen. According to the firm's portfolio manager, James Lynch, the significance of expanding long-term Treasury buybacks "is minimal," and it will not change his view that the U.S. and even European yield curves will continue to steepen. Lynch stated, "The fiscal issueslarge deficits, overwhelming corporate debt impacting the market, inflation rates still above target levels, coupled with the Fed's unclear communicationall inject additional premiums into the market. I do not believe these factors will disappear anytime soon." Barclays believes that although the actual market impact of the Treasury's latest measures is limited, the signal they send is significantinvestors are now clearly aware that if long-term yields continue to rise, the Treasury is willing to adjust its issuance structure. In the future, the Treasury could further increase buyback sizes or clearly reduce long-term bond issuance at the November financing meeting. However, the bank cites Japan's experience to caution that compressing long-term bond supplies may only buy timeafter Japan reduced ultra-long bond issuance in 2025, yields on 40-year bonds fell by about 50 basis points but then hit new highs againreal solutions will ultimately require a return to fiscal consolidation. Moreover, economists and bond traders suggest that if the U.S. Treasury persists in lowering long-term rates through its debt restructuring, it may stimulate economic activity and increase inflation stickiness, while also making the financing costs of U.S. government debt more susceptible to changes in short-term rates. Additionally, this could place greater pressure on the Federal Reserve to maintain policy independence. Joseph Brusuelas, Chief Economist at RSM US, stated that policy is gradually moving toward a direction that may require central bank support for fiscal objectives. He believes that the Treasury's intervention could distort the market and create a more challenging policy environment for the Fed under Powells leadership. Wil Stith, Senior Bond Portfolio Manager at Wilmington Trust, said that if inflation remains unchanged or even continues to rise, the looseness brought about by the Treasury's suppression of long-term yields may compel the Fed to be more aggressive in raising rates. More importantly, the recently pressured U.S. Treasury market is about to face another wave of substantial debt financing. The U.S. investment-grade corporate bond market typically sees a peak in issuance after Labor Day. With the soaring financing demands from mega-scale cloud computing companies, corporate bond issuance in September could reach $200 billion, potentially posing a new shock to the already pressured U.S. Treasury market. As some market participants have warned, U.S. Treasury yields may ultimately rise to levels that cannot be ignored; at that point, this "elephant in the room" could overturn the currently optimistic outlook of stock market bulls.