CITIC SEC: How to Understand the Surge in Yields of Developed Market Government Bonds?

CITIC SEC has released a research report stating that since the end of July, government bond yields in overseas developed markets have generally surged, which can mainly be summarized by three key factors: 1) Rising inflation expectations; 2) Increasing concerns over sovereign credit; 3) Market repricing of the monetary policy paths of central banks in developed markets. In the short term, rising interest rates are expected to continue to pressure overvalued, long-duration equity assets and intensify concerns regarding the returns on capital expenditures by hyperscalers in the U.S. In contrast, the widening interest rate differential between China and the U.S. is likely to alleviate the pressure on the renminbi's appreciation and increase southbound capitals willingness to allocate towards high-dividend assets in the Hong Kong stock market. It is recommended to continue focusing on dividend-oriented sectors such as banking, utilities, telecommunications, and property management. CITIC SEC's main points are as follows: Rising Inflation Expectations Since the end of July, data from FRED shows that the U.S. 5-year/10-year breakeven inflation rates have increased by 21bps/15bps to 2.37%/2.35%. In addition to repeated conflicts in the Middle East leading to oil price rebounds, there are four major factors that may drive a rebound in overall U.S. inflation starting this fall: 1) The pass-through effect of rising prices for Apple products; 2) The replenishment of the U.S. Strategic Petroleum Reserve; 3) Import inflation from Section 301 tariffs; 4) The rebound in residential real estate price growth transmitting to rental inflation. Increasing Concerns Over Sovereign Credit While the short-term treasury buyback plan may alleviate upward pressure on long-term U.S. Treasury yields, it is important to consider that the debt ceiling will be reached early next year, limiting the available Treasury General Account (TGA) funds. Moreover, such "Treasury Twist" operations are generally questioned for potentially harming the credibility of the U.S. dollar. Besides the U.S., the Japanese government's intentions to lower the consumption tax on food and beverages, as well as the fiscal expansion expectations driven by populist forces in the UK and France, are prompting global investors to demand a higher sovereign risk premium for government bonds in developed countries. Repricing of Central Bank Monetary Policies in Developed Markets As of September 1, 2026, CME data shows that the probability of a fed rate hike on September 16 has increased to 67%; as of August 31, the implied probabilities from OIS trading for rate hikes by the European Central Bank on September 10 and the Bank of Japan on September 18 have reached 85% and 93%, respectively. If these expectations are realized, it will mark the first time in history that the three major central banks of the U.S., Japan, and Europe raise rates in the same month or even the same quarter. Furthermore, central banks in Europe, Japan, and the UK are still in the process of balance sheet reduction, while the Fed has also paused Reserve Management Purchases, leading to a rapid shift in investor expectations regarding global liquidity. Rising Risk-Free Rates Pressure Long-Duration Assets, Hong Kong Stocks' Dividends Relatively Favorable In summary, before the upcoming decisions from central banks in Europe, the U.S., and Japan this month, the risk-free rates in global developed markets still face upward risks, creating pressure on high-valuation and long-duration equity assets. For U.S. stocks, while credit spreads on junk bonds have narrowed in the short term, the current high debt financing costs could further exacerbate market concerns regarding the returns on Hyperscaler CAPEX. In the medium to long term, if a lame-duck government emerges after the U.S. midterm elections, and if the U.S. proceeds with fiscal consolidation similar to Clinton's first term, a combination of "fiscal contraction + low inflation + stable growth" is expected to lower long-term rates and lead to a rebound in U.S. stocks driven by "valuation + earnings." For Hong Kong stocks, the widening interest rate differential between China and the U.S. may temporarily ease the trend of renminbi appreciation and enhance southbound funds' willingness to allocate towards high-dividend assets. It is advisable to focus on highly certain fundamentals with substantial southbound participation in dividend sectors, including banking, utilities, telecommunications, and property management. Risk Factors: 1) U.S. Treasury buybacks exceed expectations; 2) Global central banks tighten monetary policy beyond expectations; 3) Global geopolitical conflicts escalate again, etc.