The surge in U.S. Treasury yields hits the performance of risk assets.


Robust economic growth has raised expectations that the Federal Reserve will keep interest rates high. Treasury yields have hit their highest level since 2007, leaving stockholders and speculative asset investors uneasy.

The robust economic growth has fueled expectations that the Federal Reserve will maintain higher interest rates for a longer period, pushing the yield on U.S. Treasury bonds to its highest level since 2007 this month. This surge in Treasury yields has increasingly unsettled investors in stocks and other speculative assets.

This month, influenced by the sharp rise in yields across all maturities of U.S. Treasury bonds, the S&P 500 index has fallen by 4%, S&P 500 tech stocks have dropped 5.7%, and the ARK Innovation ETF (ARKK) managed by Cathie Wood has plummeted by 18.5%.


The rise in U.S. Treasury yields not only impacts various risk assets but also raises the overall economic or financial system's financing costs, putting increased debt pressure and scaling on some businesses.

Sameer Samana, a senior global market strategist at Wells Fargo Investment Institute, stated that the surge in Treasury yields signifies the end of "good days" for assets like cryptocurrencies and small to medium-sized growth companies. Samana mentioned that in the coming period, the market's clearest theme would favor sectors or companies with low financing and credit dependency. Meanwhile, small caps, emerging markets, real estate investment trusts, and non-essential consumer stocks may continue to face pressure from rising Treasury yields.

Later this week, central bank governors from around the world will hold their annual meeting in Jackson Hole, Wyoming, where Fed Chairman Powell may speak about the economic and monetary policy outlook, posing a critical test for financial markets brought by the Jackson Hole central bank annual conference.

Matt Maley, Chief Market Strategist at Miller Tabak, indicated that investors are realizing rates will not fall as quickly as they had imagined, which might force them to adjust their investment decisions.

According to the latest weekly data from Refinitiv Lipper, U.S. investors have net sold equity funds for the third consecutive week in the week ending August 16, with money market funds seeing a net inflow of about $32.5 billion, the largest since July 5. Meanwhile, Deutsche Bank measured investor equity positions have fallen for the fourth consecutive week, dropping to a two-month low.

Despite the drag on corporate earnings prospects and the stock market's future performance from soaring Treasury yields, some institutions remain optimistic about the stock market's outlook due to the stable economic growth momentum in the U.S. Goldman Sachs' equity strategists said on Monday that retail and institutional investors' stock holdings are below historical levels, and if the U.S. economy maintains its current growth momentum, the recently reduced stock holdings could be replenished, potentially supporting the stock market.

Randy Frederick, Vice President of Trading and Derivatives at Schwab Center for Financial Research, believes that earnings of S&P 500 companies may have bottomed out in the second quarter and will expand in the third quarter, pushing the index to record highs by the end of the year.

Frederick stated that although the era of low interest rates is over, companies with large amounts of debt will not only face tremendous pressure from their obligations but will also need to refinance these debts at higher rates. However, in the current economic environment, these adversarial factors are temporary.

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