[Interview] U.S. 10-Year Treasury Yield Surpasses 5%: "Stabilization Coming Soon"

U.S. Investment Expert Lee Chungkwang, CEO of Legnum Investment Advisory

"Uptrend Expected Until End of September... Still Too Early to Invest in Treasuries"

"Many Policy Tools Left, Including U.S. Government Buybacks and Fed Operation Twist

"Currently, the yield on long-term U.S. Treasury bonds is at a highly pressured level. However, this upward trend is expected to stabilize soon."

Lee Choongwang, CEO of Regnum Investment Advisory and former JP Morgan Asset Management professional, recently appeared on The Asia Business Daily's economic YouTube channel "Money Mani" and stated, "This (Treasury) yield uptrend will likely persist until the end of September," adding these remarks.

The yield on 10-year U.S. Treasury bonds, which serves as the global interest rate benchmark, has already surpassed 5%, a level often considered a "psychological threshold." On the morning of the 15th (local time), just one day before the Federal Open Market Committee (FOMC) meeting, it even rose to 5.041%, the highest since July 2007. The yield on 30-year bonds, which is highly sensitive to geopolitical risks, also exceeded 5.4% during intraday trading, reaching the highest point since June 2007.

Lee cited five independent reasons for the recent surge in U.S. long-term Treasury yields: fiscal burdens and national debt; a surge in corporate bond issuances due to artificial intelligence (AI) investments; concerns about expected inflation triggered by the Middle East conflict; policy uncertainty; and support from real interest rates.

First, Lee noted, "Although the U.S. fiscal deficit is an old issue, the market was startled last month when national debt surpassed 40 trillion won. However, the most direct causes are AI investments and the Middle East war." He explained that hyperscalers, seeking dominance in the AI market, have engaged in massive investments, leading to a steep increase in corporate bond issuance to secure funding.

He added, "Companies like Microsoft (MS) and Google have higher credit ratings than U.S. Treasuries. The yield on Google's 100-year bond is even higher than that of U.S. Treasuries. So, investors are inclined to sell Treasuries and buy corporate bonds, which directly pushes up long-term yields."

Additionally, recent increases in global oil prices stemming from the Middle East conflict have intensified inflation concerns, further accelerating the sell-off in Treasuries. In anticipation of prolonged tension in the Middle East, Brent oil futures have surpassed $108 per barrel, while West Texas Intermediate (WTI) is trading around $105 per barrel.

However, Lee said, "I agree that expected inflation has risen due to the oil price surge from the Middle East conflict," but added, "If we look at actual inflation, the impact from oil price increases has not materialized yet." He pointed out that investors should distinguish between expected inflation, which is the subjective outlook of economic participants regarding future price levels, and the actual inflation rate.

He further explained, "The policy uncertainty has also intensified with Kevin Warsh taking on the role of Federal Reserve (Fed) Chair, and efforts by so-called bond vigilantes and Wall Street to discipline the market have also contributed to the situation. Coincidentally, these four or five factors have converged, resulting in the rise in long-term Treasury yields."

Lee specifically highlighted that this rise in government bond yields is not limited to the U.S. market. Japanese 10-year bond yields hovered at 3.04%, German 10-year bonds at 3.54%, and in the Seoul bond market, 10-year yields reached 4.555%. This is an increase of more than 1 percentage point since January 2, when it was 3.386%. He emphasized, "Investors should be aware that government bond yields have risen not only in the U.S. but also in other major economies."

Lee Choongwang, CEO of Regnum Investment Advisory, recently appeared on The Asia Business Daily's economic YouTube channel "Money Mani" and shared his insights.

There is growing concern both inside and outside the market that further increases in Treasury yields could have a negative impact on the stock market and the broader economy. Regarding this, Lee forecasted, "Since this uptrend is likely to continue until the end of September, it is still too early to invest in Treasuries." However, he also predicted, "The trend of rising long-term yields will soon enter a stabilization phase." While additional increases are possible, he assessed that yields are already close to their upper bound. Specifically, for 10-year yields, even if they surpass 5%, it would be "difficult" for the uptrend to persist for an extended period.

Lee also remarked, "The rise in long-term yields brings various side effects, but the aspect that concerns the U.S. most is its national standing. The U.S. would not merely stand by and watch such a significant rise in yields. There are still several policy tools available." Although the U.S. Treasury was unable to completely halt the market's selling pressure, its earlier announcement to expand buybacks of long-term Treasuries was also a measure aimed at stabilizing the bond market.

In addition, Lee proposed that "the Fed could also take action," listing quantitative easing (QE), Operation Twist, and yield curve control (YCC) as its main options. He predicted that among these, "Operation Twist is the most likely." In Operation Twist, the Fed sells short-term Treasuries and purchases long-term Treasuries, thereby lowering long-term yields, a policy similar to the Treasury's buybacks of previously issued government bonds on the market. He also noted that, contrary to Fed Chair Warsh's announcement of balance sheet reduction, the Fed's balance sheet is actually expanding, pointing out that "they are quietly purchasing bonds in the market."

On the same day, Lee dismissed the stock market's seasonal adage "buy in September and sell in November" as a "statistical bias." While September has historically been cited as the worst month for U.S. stock returns, he argued that except for major events such as the global financial crisis and the Fed's aggressive rate hikes in 2022, returns have generally been satisfactory.

Regarding the memory semiconductor sector, which has led stock price gains this year, Lee predicted that the upswing would continue through the first half of next year. "If we look at hyperscalers' CAPEX investments on a year-over-year basis, quarterly investment growth will slow in 2027. After the first half of next year, we may see volatility arising from this, but until then, I believe there will be no issues with memory semiconductor investment," he diagnosed. He further stressed that amid heightened uncertainties such as high market rates and the Middle East conflict, what investors should ultimately focus on is "corporate earnings."

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