The yield on U.S. 10-year Treasury bonds has surpassed 5% for the first time in 19 years, yet foreign investment is flowing more into stocks than bonds. Analysts suggest that concerns over rising government debt and inflation are diminishing the appeal of Treasury bonds, while expectations for corporate earnings driven by increased investment in artificial intelligence (AI) are supporting the stock market.
According to the International Financial Center, on September 15 (local time), the yield on U.S. 10-year Treasury bonds rose to 5.04% during trading before closing at 5.00%. This marks the first time the closing yield has exceeded 5% since 2007. Market observers attribute the rise in yields to high inflation, fiscal pressures, the potential for further tightening by the Federal Reserve, and prolonged expectations of rising oil prices.
Despite the surge in bond yields, foreign investment in the stock market has been notably stronger over the past year. According to the Financial Times, foreign investment in the U.S. stock market during this period reached 2.8% of the U.S. gross domestic product (GDP), while funds flowing into U.S. Treasury bonds accounted for only 2% of GDP. This trend is unusual, especially when excluding specific periods like the financial crisis or the COVID-19 pandemic.
The reluctance of foreign investors to flock to Treasury bonds, despite high yields, stems from growing concerns about U.S. fiscal health. As government debt increases, rising interest rates lead to higher interest burdens on the government and greater pressure to expand bond supply. Coupled with inflation fears and questions about the independence of the Federal Reserve, some market participants are increasingly questioning the safe-haven status of U.S. Treasury bonds, according to the Financial Times.
In contrast, the U.S. stock market benefits from growth driven by increased AI investment. Amid the technological competition between the U.S. and China, significant investments in data centers, semiconductors, and power infrastructure are likely to continue. Goldman Sachs projects that cumulative spending on AI could reach 5% of global GDP by 2030. The expectation that AI investments will lead to improved corporate earnings is attracting foreign capital to the stock market.
However, rising long-term interest rates pose a burden on the stock market as well. On September 15, the S&P 500 index fell by 0.45%, while the dollar index rose by 0.26%. The market is discussing the possibility of a rate hike at the Federal Open Market Committee (FOMC) meeting in September, as well as the potential for additional increases later this year. If bond yields continue to rise, the cost of capital for companies and the discount rate for stocks may increase, potentially weakening the flow of foreign investment into the stock market.
* This article has been translated by AI.
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