Surging oil prices whip up a yield storm! As the "anchor of asset pricing" hovers around 5%, high-grade bonds and quality cash flows like "Apple" return to the spotlight.

Title context: Surging oil prices whip up a yield storm! As the "anchor of asset pricing" hovers around 5%, high-grade bonds and quality cash flows like "Apple" return to the spotlight. Text: The Middle East geopolitical conflict triggered by the U.S.-Iran war since late February appears to be escalating across the board from a Strait transit risk into an unprecedented global energy supply shock characterized by "blocked straits, threatened alternative routes, and disrupted bypass pipelines." The Houthis' seizure of Mokha Port and Perim Island, and further control of the Greater and Lesser Hanish Islands; Saudi Arabia has launched airstrikes in retaliation, and the security risks facing Red Sea energy exports continue to expand. Meanwhile, the Saudi East-West Pipeline, which undertakes the task of bypassing the Strait of Hormuz for transportation, was attacked and shut down. The pipeline had recently been transporting approximately 4 million to 5 million barrels of crude oil. The energy shock quickly transmitted to the global discount rate systemon September 15, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," touched 5.041% intraday, hitting a new high since 2007. This surge in 10-year Treasury yields has also dealt a heavy blow to risk assets such as equities in recent days. After the 10-year Treasury yield broke back above the critical 5% threshold, it is more likely to usher in a period of high-level tug-of-war and accelerated divergence in asset performance, especially before the energy shock and the continued substantial expansion of U.S. fiscal deficits clearly ease. The conditions for rapidly replicating the sharp yield decline of late 2023 are not yet sufficient. With the 10-year Treasury yield hovering near 5%, the traditional 60/40 stock-bond diversified investment strategy may still face significant challenges. A broader risk-parity portfolio may be more suitable for the current macroeconomic backdrop of an elevated yield curve compared to a 60:40 stock-bond allocation. From the perspective of active asset allocation, a 5% 10-year Treasury yield substantially improves the expected return prospects for high-quality fixed-income assets. A persistently high-yield environment favors companies with long-term strong cash flow generation, self-funding attributes, and long-term solid fundamentals, while putting pressure on speculative, long-duration growth stocks. The East-West Pipeline that Saudi Arabia spent heavily to buildrecently transporting approximately 4 million barrels per day of crude oil to Yanbuhowever, the reality is that under the Houthis' new round of intense pressure, Yanbu inventories are expected to sustain exports for only 5 to 7 days. This means that the critical bypass pipeline and the alternative route to the Strait of HormuzBab el-Mandeb Strait shippinghas nearly come to a standstill compared to before the war broke out. If the Saudi oil suspension continues until inventories are insufficient to support loadings, approximately 4% of global energy supply could be threatened. The core logic behind this round of sharp increases in crude oil and refined product prices is thatHormuz navigation, which is critical to 20% of global energy supply, has not yet returned to normal; the Saudi-led Bab el-Mandeb Strait energy transportation system and other shipping and onshore pipelines outside the Strait of Hormuz that serve as alternative export functions for Middle Eastern Gulf oil and gas producing countries have been successively interrupted by Houthi military strikes. The market needs to reassess the deliverable quantities of oil and natural gas and the timeline for recovery. These numerous unfavorable factors surrounding geopolitics have driven Brent crude oil to continue rising this week, once approaching the $110 mark, with gains exceeding 60% since the U.S.-Iran war in late February. Oil prices ignite a rate storm, "anchor of global asset pricing" breaks through 5%! Who might be the winners and losers in a high-yield environment? The U.S. Energy Corp. Secretary judged that oil transportation could resume within days, while other internal sources disclosed estimates that full repairs might take five to six weeks, during which partial capacity might be restored first. What determines the persistence of the oil price shock is not only when facilities restart, but also whether actual export volumes can be stably restored. This market repricing surrounding energy inflation and an unprecedented oil supply disruption crisis in human history has fully spread to global long-duration government bond markets. On September 15, the 10-year U.S. Treasury yield touched 5.041% intraday, hitting a new high since 2007; Japan's 10-year government bond yield rose to approximately 3.04%, a thirty-year high, and the country's 30-year government bond yield also hit a multi-decade historic high of approximately 4.21% in September; Germany's 10-year government bond yield rose to 3.572%, hitting a new high since 2009. From a pricing mechanism perspective, the market is bearing the pressure of energy inflation, policy rate expectations, and long-term bondholding risk compensation all rising together; even if rate hikes themselves have been largely priced in, whether tightening will continue, whether inflation can fall back, and whether fiscal deficits and interest expenses will further expand could still trigger new price volatility. Japanese long bonds are also under pressure from domestic monetary policy normalization expectations and expectations of a new round of large-scale fiscal stimulus being contemplated by the Takaichi Sanae government. Therefore, although government bond yields across countries are rising in the same direction, the primary drivers are not entirely overlapping. However, the common denominator is concentrated in persistent high inflation expectations brought about by continuously climbing energy prices and the surge in long-duration government bond term premiums caused by accelerating fiscal deficit expansion. As of before the Federal Reserve's FOMC rate decision was announced on September 16 local time, interest rate futures market pricing data showed that traders unanimously assigned an implied probability of approximately 93% to the Fed announcing a 25 basis point rate hike at this FOMC monetary policy meeting, up from 61.2% a week earlier. The 10-year U.S. Treasury is called the "anchor of global asset pricing" because of its benchmark status in the dollar financing system and in medium- to long-term cash flow valuation. The U.S. Treasury market is massive and actively traded, and the dollar is widely used for international financing and reserves, so changes in its yield have cross-market influencedollar corporate bonds typically reference Treasury yields of similar maturity plus credit spreads, mortgage rates are affected by Treasury and mortgage-backed securities pricing, and stock and real estate valuations are highly sensitive to the discount rate applied to future cash flows. From a theoretical perspective, the 10-year Treasury yield is equivalent to the risk-free rate indicator r in the denominator of the DCF valuation model, an important valuation model in the stock market. If other indicators (especially cash flow expectations in the numerator) do not change significantlyfor example, during earnings season, when the numerator is in a vacuum period due to a lack of positive catalyststhen if the denominator level is higher or continues to operate in the historically extreme high range above 5%, the valuations of risk assets such as AI-related tech stocks, high-yield corporate bonds, and cryptocurrencies that are at historically elevated levels face the threat of collapse. Therefore, under the scenario where the 10-year Treasury yield may hover around the historical high of 5% for an extended period, it is not that "when Treasury yields reach 5%, all risk assets should be sold," but rather distinguishing between price losses caused by continued rate increases and long-term investment opportunities brought about by a high starting yield. The core allocation directions given by Wall Street investment strategy research firm D.M. Martins Research show a focus on companies with high-quality fundamentals and long-term strong cash flow performance, such as Apple Inc. (AAPL.US), Microsoft Corporation (MSFT.US), Costco (COST.US), and Walmart Inc. (WMT.US), and the need to clearly distinguish NVIDIA Corporation (NVDA.US)the world's highest market cap company with strong cash flows, namely the leader in the AI computing theme and "AI chip dominator"from other speculative growth stocks focused on the AI infrastructure frenzy whose business models have not yet been validated. This logic regarding the long-term AI revenue trajectory and whether cash flows are solid is also the core reason why U.S. cloud computing giants significantly outperformed the Philadelphia Semiconductor Index on Monday. Some of the most core cloud giants (Hyperscalers) in this infrastructure frenzy actually rose against the trend on Monday: Alphabet Inc. Class C parent Alphabet closed up more than 3% against the trend, Microsoft Corporation rose 1.97%, and Meta gained about 2.7%. Amazon.com, Inc. closed slightly down 1.26%, but its resilience was still far superior to a host of chip stocks. They possess massive cash flows and can continuously capture ROIC from already-built facilities. As for the bond side, D.M. Martins Research prefers high credit quality corporate bonds, using Apple Inc.'s (AAPL.US) 10-year corporate bond as an individual bond example and the investment-grade corporate bond ETFLQD as a diversified allocation tool. What should relatively be avoided are companies in themes such as quantum computing, alternative energy, electric vertical takeoff and landing aircraft, and space exploration whose business models have not been fully validated and whose primary value depends on distant future cash flowsrather than indiscriminately rejecting these industries. For long-term allocation, the S&P 500, long-duration U.S. Treasury ETFs, gold, commodities, and managed futures strategies (CTA) can still jointly constitute candidate assets under a risk parity framework. The investment dividing line seems to be shifting from "tech versus traditional industries lagging behind the times" to "cash flows already realized versus still dependent on future financing and forward promises." D.M. Martins Research states that the reason high long-term Treasury yields may be beneficial for fixed-income investment is that, over the long term, bonds issued by extremely high credit quality issuers have annualized returns approximately equal to the yield at the time of investment. This relationship also holds for funds holding these bonds. The scatter chart below shows the relationship between a bond fund's future returns and the yield at the time of initial investment. Note that the iShares 7-10 Year Treasury Bond ETF (IEF.US) currently has a weighted average maturity of 8.5 years, and its average annualized return over 10-year holding periods has consistently been very close to the 10-year U.S. Treasury yield at the starting point of that 10-year period. D.M. Martins Research states that the conclusion drawn from this is that higher rates/yield curves can absolutelyand likely willmean higher expected investment returns in the future. Within the investment-grade bond universe, capital tends to favor extremely high credit quality corporate bonds during high-yield periods. Today, the issue of rising government debt, especially federal government debt, is forming a heated yet highly relevant debate, and persistent budget deficits and the negative effects of high interest rates are exacerbating this problem. Although all credit rating agencies rate U.S. federal government debt near the highest credit quality level, the related narrativewhich also extends to foreign policy and trade policydoes not seem to fully align with conservative investment principles. Meanwhile, high-cash-flow, defensive, high-quality fundamental companies like Apple Inc. (AAPL.US) have fortress-like balance sheets, generate substantial free cash flow annually, possess high-quality corporate governance, maintain relatively prudent capital expenditure arrangements, and their 10-year bonds offer a 20 basis point spread over comparable-maturity U.S. Treasuriesnot much, but still pleasing. Constructing a basket of bonds issued by such strong companies might be achieved through a fund like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), and even a considerable portion of issuer-specific credit risk can be reduced through diversification. On the equity side, D.M. Martins Research believes speculative growth stories may become losers. Companies like NVIDIA Corporation (NVDA)currently expected to grow earnings per share at 44% annually over the next five yearsprobably do not fall into this category, because their businesses are closely tied to long-term structural trends and are actively participating in them, and these trends are already strongly underway and clearly reflected in the companies' income statements and cash flow statements. Rather, D.M. Martins Research refers to companies whose business models have not been fully validated: despite attractive long-term potential, they are likely to be hit by two factors: (1) rising expected returns on near-risk-free investments; and (2) higher discount rates making distant future cash flows less valuable. To illustrate this point alone, imagine a company whose substantial cash flows are expected to begin only a decade from now and beyond. D.M. Martins Research further assumes it has no debt on its balance sheet and that it has high sensitivity to the overall stock marketadding some other simplifying assumptions for mathematical calculationthen for every one percentage point increase in the risk-free rate, this company's market value could decline substantially; here the risk-free rate is broadly defined as the 10-year U.S. Treasury yield. See the chart above: a mere one percentage point increase in the risk-free rate is sufficient to explain a market value decline of nearly 40% on a valuation basis. This is also why companies in fields such as quantum computing, alternative energy, electric vertical takeoff and landing aircraft (eVTOL), and space exploration are investment themes that D.M. Martins Research generally does not pursue at present. Of course, if a small number of companies have highly compelling, company-specific bullish cases, exceptions can be considered. Don't bet on rate inflection points; rebuild allocation defenses with cash flows and risk parity A 5% yield first means an improved starting point for future returns, not that bond prices have already bottomed. Yields "rising" and yields "already at high levels" correspond respectively to repricing pressure on existing assets and return opportunities for new investments, and the two can coexist. The initial yield of high-quality bonds can provide an important reference for long-term returns, but it cannot be understood as meaning that the same return can be stably obtained every year in the future; yield to maturity also does not equal the actual realized total return, which is still affected by reinvestment conditions, timing of purchases and sales, and related costs. For example, assume a bond portfolio has a modified duration of 8 years. If yields rise by another 1 percentage point, the first-order approximate price loss is about 8%, not yet including convexity adjustment, which is sufficient to significantly offset that year's interest income. Therefore, establishing bond positions requires matching the holding period with the ability to withstand price volatility, rather than concentrating bets on long duration solely because "yields are already very high." The real dividing line in equity allocation is between growth that can self-fund and growth that must continuously raise financing to sustain itself. Microsoft Corporation, Costco, and Walmart Inc. being included in the watchlist reflects a preference for operating quality, financing independence, and cash flow resilience; NVIDIA Corporation being explicitly excluded from typical speculative growth stories reflects recognition of structural growth already reflected in profits and cash flows. An important boundary must be preserved herethe 44% annual EPS growth over the next five years is Wall Street analysts' forecast for NVIDIA Corporation, not an already-achieved growth rate, and cannot be directly treated as the market consensus. The further investment inference is that high-quality companies may be more capable of digesting high interest rates, but this does not mean their stocks are cheap at any price; screening criteria should still simultaneously cover operating cash flow, capital expenditure needs, debt maturity structure, and purchase valuation, and "quality company" cannot be automatically equated with "low-risk investment." The appeal of high-grade corporate bonds comes from credit quality and yield compensation, not from detaching from the sovereign rate system. The 20 basis point spread of Apple Inc.'s 10-year corporate bond over comparable-maturity U.S. Treasuries is point-in-time data used in the original draft; its allocation logic lies in supporting credit quality with a strong balance sheet and cash flows, and then obtaining a certain additional yield. What is most vulnerable to valuation compression is "equity duration" with distant cash flows and commercialization yet to be validated. When primary cash flows will not appear until a decade later, changes in the discount rate have a stronger impact on their present value, and at the same time, higher near-risk-free yields also raise the opportunity cost for investors waiting for uncertain returns. The final answer for asset allocation under a 5% yield backdrop is to actively select strong cash flows plus high-quality fundamentals while using assets with different macroeconomic sensitivities to diversify risk. For active investors, high-quality stocks and credit-screened investment-grade corporate bonds are research directions more consistent with this framework; for long-term allocators, SPY, TLT, GLD, DBC, and CTA are candidate tools under a risk parity framework, rather than a fixed-ratio portfolio that can be directly copied. This is also why D.M. Martins Research emphasizes that the further allocation inference isequity assets in the stock market bear long-term growth risk, long-term Treasuries retain exposure to scenarios of slowing growth and some decline in rates/yield curves, gold, commodities, and managed futures are used to introduce different sources of risk, and position sizing is then determined by combining risk contribution, correlation, and rebalancing arrangements.