Recently, the 10-year US Treasury yield broke above 5%, and with the Fed's rate hike, market disagreement over the interest rate trajectory has intensified. One view holds that AI-driven capital expenditure is systematically lifting the neutral rate, pushing the long-end rate center from the 2% range of the past decade to 4%-5%, a "paradigm shift" in the rate center. Another view sees this as a cyclical phenomenon stemming from oil price shocks compounded by rate hike expectations. How long will the rise in US Treasury yields persist? How deep is the actual transmission to Chinese assets and industries? These have become the market's focal points.
Wei Fengchun, Chief Economist at China Goldjoy Fund, believes that the core of this synchronous rise in long- and short-term yields is a paradigm shift in the rate center, not merely cyclical fluctuation, and that the high-rate plateau will likely extend into the first half of 2027. The transmission chain of US Treasury yields to emerging markets is undergoing structural restructuring, and the real impact on the RMB exchange rate, A-shares, and Hong Kong stocks has been overly amplified by the market. What truly warrants vigilance is the gradual erosion at the real-economy level, including the diminishing efficiency of accommodative policy transmission and shrinking corporate capital expenditure. In asset allocation, the fixed-income side should lock in high coupon yields with short-duration assets, while the equity side should focus on high-quality targets with stable cash flows and a return on invested capital (ROIC) that consistently outpaces financing costs. During a rate hike cycle, asset allocation faces an impossible trinity: high returns, low volatility, and high liquidity cannot be achieved simultaneously. The rate hike landing is not the end of bad news; one should not simply bet on a policy pivot but instead adopt a long-term, steady approach to positioning.
Question 1: While the 10-year US Treasury yield broke above 5%, the 2-year yield also climbed, accompanied by discussions of a "paradigm shift." Is this a systemic upward move in the rate center or cyclical fluctuation? How long will the uptrend last, and what are the key variables?
Wei Fengchun: The synchronous rise in long- and short-term US Treasury yields this round is fundamentally a paradigm shift in the rate center, not merely cyclical fluctuation. Unlike past demand-pull episodes where fiscal policy borrowed against future income, this rate uptrend is driven by AI-related corporate capital expenditure, where competition for productive capital pushes up real capital prices, systematically lifting the neutral rate center. This serves as the core support for high rates in the medium term. Meanwhile, cyclical factors such as oil price shocks and the release of rate hike expectations have amplified yield volatility. Key variables include oil price trends, the pace at which monetary tightening suppresses capital returns, and the stability of fiscal financing expectations. On balance, the high-rate plateau is likely to extend through the first half of 2027. Compared to the elevated rate center, rising market volatility is the more critical risk to guard against.
Question 2: Under traditional logic, rising US Treasury yields and a stronger dollar would trigger capital outflows from emerging markets. However, the RMB exchange rate has not been significantly affected by Sino-US interest rate differentials recently, with strong exports and FX settlement demand providing a buffer. Does this mean the elasticity of the "Treasury yield-dollar-emerging market capital flows" transmission chain is changing? How does the rise in US Treasury yields transmit to global financing costs?
Wei Fengchun: The traditional transmission chain linking US Treasury yields, the dollar, and emerging market capital flows has not broken; rather, it is undergoing structural restructuring. During this round of surging Treasury yields, the RMB exchange rate has remained resilient, mainly because the absolute level of interest rate differentials determines the long-term asset allocation center, while marginal changes in the differential drive short-term capital flows. Currently, global cross-border capital regulation is tightening, and widening rate differentials are a common global phenomenon, which weakens cross-border arbitrage incentives and significantly reduces capital's sensitivity to rates. Combined with strong domestic exports and robust corporate FX settlement demand, the localization of trade settlement lowers FX exposure, creating an effective exchange rate buffer. Overall, US Treasury yields remain highly efficient in transmitting through risk-free rates and credit spreads globally, but the elasticity of transmission through exchange rates and capital flows has weakened substantially, with the exchange rate's sensitivity to rates becoming a time-varying variable.
Question 3: Under the "self-oriented" policy stance, how significant is the real impact of rising US Treasury yields on Chinese assets? What is being overestimated, and what is being underestimated?
Wei Fengchun: The divergence of Sino-US monetary policies and the deep inversion of interest rate differentials set an external valuation ceiling for domestic long-term bond yields, but the actual impact on A-shares and Hong Kong stocks has been overly amplified by the market. From a pricing logic perspective, US Treasury yields only affect the discount rate in the denominator of asset pricing, while the earnings numerator of domestic equity assets is driven by domestic policy direction, industrial iteration, and domestic demand cycles. The current domestic economy appears weak but is actually strong, in a stalemate phase where old momentum is clearing and new momentum is building, with asset pricing centered on internal logic. The market generally overestimates the sentiment shock of rising US Treasury yields while underestimating three hidden real-economy transmissions: the diminishing efficiency of accommodative policy transmission, contraction in corporate capital expenditure, and the sustainability risk of the exchange rate buffer. This gradual erosion is the core risk at present.
Question 4: The Fed partly attributes the rise in US Treasury yields to capital competition from AI-related capital expenditure. If this assessment holds, it means the US is experiencing a technology-driven expansion in capital demand, with implications for interest rates that are fundamentally different from traditional fiscal deficit-driven rises. China is also part of the global AI industry chain. How will rising US Treasury yields combined with Fed rate hikes affect China's AI industry?
Wei Fengchun: The rise in long-end US Treasury yields this round is essentially an industrial byproduct of capital demand spawned by the US AI technology revolution, distinct from rate rises driven by fiscal deficits. For China's AI industry, it creates two-way structural influences. On the negative side, under the global AI technology race, the industry relies heavily on continuous capital investment, and higher overseas financing costs can compress industry R&D cash flows, creating investment barriers and competitive pressure. On the positive side, tightening external financing constraints and intensifying technology competition will force domestic AI industries to strengthen self-reliance and control, reshaping the industry's value distribution landscape. From a Kondratieff cycle perspective, AI industry development rests on an energy and computing infrastructure base. It is unnecessary to unilaterally judge rates as bearish; the key is to distinguish differences in financing dependence and the mix of domestic versus export orders across various segments of the industry chain.
Question 5: Some strategy research points out that the S&P 500's forward earnings yield has fallen below the 10-year US Treasury yield, compressing the safety cushion of stocks relative to bonds. For multi-asset allocation, should one reduce duration risk now, or use the high rate level to lock in returns?
Wei Fengchun: With the S&P 500 earnings yield now below the 10-year Treasury yield, the stock-bond safety cushion has narrowed, primarily because the discount rate in the denominator is rising much faster than earnings repair in the numerator. There is no single optimal solution of simply reducing duration or chasing returns; a structured, balanced allocation is needed. On the fixed-income side, abandon band trading for capital gains, use short-duration assets to lock in high coupon yields, hedge against the dual rise in term premium and volatility, reduce net asset value drawdowns from duration exposure fluctuating with rates, use certain coupon yields as the portfolio's underlying safety cushion, and refrain from speculating on rate turning points. On the equity side, do not broadly cut positions; instead, focus on optimizing the portfolio's valuation structure, concentrating on high-quality targets with stable cash flows and ROIC that consistently outperforms financing costs. Avoid companies with high leverage or earnings heavily dependent on accommodative liquidity, and earn returns from intrinsic enterprise value growth rather than valuation expansion. Additionally, allocate to assets independent of the global rate cycle to weaken the synchronized movement of stocks and bonds and further diversify portfolio risk. During a rate hike cycle, asset allocation faces an impossible trinity: high returns, low volatility, and high liquidity cannot all be achieved. The rate hike landing is not the end of bad news; the persistence of high rates and lagging economic downside pressure will continue to suppress asset pricing. One should not simply bet on a policy pivot, but instead adopt a long-term, steady approach, dynamically track earnings and credit changes, and gradually adjust portfolio structure.
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