[Weekend Money] U.S. Treasury Yields Rising... "Time to Reduce AI Stocks and Increase Financial & Defensive Shares"

10-Year U.S. Treasury Yield Surpasses 4.7%
Geopolitical Risks and Fiscal Deficit Weigh on Markets
"Reduce Exposure to Growth Stocks, Increase Defensive and Financial Holdings"

As U.S. Treasury yields surge once again, experts advise reducing exposure to growth stocks such as those in artificial intelligence (AI), and instead increasing allocation to defensive sectors like consumer staples and healthcare, as well as financial stocks. This recommendation stems from concerns that rising oil prices due to the war between the United States and Iran, increasing fiscal burdens, and fears of large-scale Treasury issuance may push the yield on 10-year U.S. Treasuries back toward the 5% mark.

U.S. Treasury Yields Approaching 5% Again

Ilhyeok Kim, a researcher at KB Securities, recently analyzed: “From a macroeconomic perspective, rising interest rates, and from an industry perspective, downward pressure on token prices are burdening AI-related stocks.”

 

A trader is working at the New York Stock Exchange in the United States. Photo by AFP News Agency

The yield on 10-year U.S. Treasuries, which stood at around 4.4% just one month ago, has recently climbed to the 4.7% range. The yield on Treasury Inflation-Protected Securities (TIPS), which reflects the real interest rate after adjusting for inflation, has also risen to 2.428%, marking the highest level since October 2023.

The issue is that the term premium, which represents additional compensation for holding long-term bonds, remains below previous highs. If the term premium, with all other conditions unchanged, returns to levels seen in May, there is a possibility that the 10-year yield could surpass the January 2025 figure of 4.792%. Kim explained, “If the burden of increased Treasury issuance pushes rates beyond their previous peak, the market may start to envision yields rising to 4.989%, a level established in October 2023.”

In the futures market, the probability that the Federal Reserve (Fed) will raise the federal funds rate at the upcoming Federal Open Market Committee (FOMC) meeting in September is already reflected up to 78.6%. A series of events that could affect the direction of U.S. monetary policy are lined up, starting with the regular FOMC meeting at the end of this month, the Treasury’s quarterly refunding announcement (QRA) on the 5th of next month, and the release of the July Consumer Price Index (CPI) on the 12th.

A Need for Portfolio Adjustment... Tactical Response with Defensive & Financial Stocks

Rising interest rates are also a burden on the AI industry. AI model companies are facing competitive pressure to lower 'token prices', which are usage fees. Moreover, as market interest rates climb, the capital raising costs for companies needing to invest heavily in data centers and semiconductors also rise.

This sentiment was evident in Alphabet’s recent earnings results. Investors’ attention shifted from strong growth in the cloud business to the company’s increased capital expenditure plans. This suggests that AI infrastructure investments are increasingly being viewed from the perspective of capital cost burden rather than solely for growth potential.

The weak demand for Amazon’s $25 billion corporate bond issuance on the 7th of this month was interpreted in a similar light. Ongoing concerns also persist regarding Oracle, whose credit rating has been downgraded. At the time of the report, Oracle’s credit default swap (CDS) premium hit an all-time high of 210.8 basis points (1bp = 0.01 percentage point).

Kevin Wash, Chairman of the Federal Reserve (Fed), is speaking before the House Financial Services Committee at the U.S. Capitol in Washington on the 14th (local time). Photo by AP Yonhap News

Researcher Kim suggested that, going forward, tactical responses such as reducing the proportion of growth stocks that are highly sensitive to interest rates are necessary. Given that the trajectory of oil prices and interest rates could change depending on the outcome of the U.S.-Iran war, he believes investors should prepare for short-term risks rather than overhaul long-term investment strategies.

As alternatives, he recommended sectors less sensitive to economic cycles, such as consumer staples and healthcare, as well as financial industries like major banks and insurance companies. He explained that, until the outlook for U.S. monetary policy, Treasury supply, and inflation is clarified by early next month, it is advantageous to reduce exposure to stocks vulnerable to high interest rates. Kim emphasized, “Rather than making large-scale strategic reallocations, it is necessary to tactically reduce exposure to growth sectors vulnerable to rate hikes, and increase positions in defensive and financial sectors.”

This content was produced with the assistance of AI translation services.