Continued Upward Pressure on US Treasury Yields... Will AI Corporate Profits Offset the High Interest Rate Burden?

As the Federal Reserve (Fed) removes cautionary language regarding downside economic risks and begins to guard against inflation risks, the market's attention is focused on the direction of future monetary policy and the trajectory of treasury yields. While the opinions of Fed officials show a wide spectrum regarding next year's interest rate policy, the possibility of maintaining a high interest rate stance is being raised.

Fed Dot Plot and Monetary Policy Direction

Woori Bank economist Park Hyeong-jung pointed out the change in the Fed's attitude following the September FOMC meeting. According to economist Park, while the Fed has previously paid attention to downside economic risks through its statements, it removed relevant language during the September FOMC and instead began to guard against the risks of inflation. The opinions of officials shown through the dot plot are very diverse through next year. They are widely distributed, ranging from opinions that interest rates should be frozen to opinions that additional hikes or cuts are necessary.

However, based on current projections, only a few officials within the Fed argue for a base interest rate cut. The majority are of the position that high interest rates should be maintained until next year. Accordingly, it was analyzed that if an additional hike occurs within this year, it is more likely to be in December rather than October. In the case of the Bank of Korea, there is a possibility that the base interest rate will be raised once more within the year to match the tightening stance of global central banks, with forecasts suggesting it could rise up to 4%, exceeding the market consensus of 3.75%.

Fiscal Instability and Investor Changes Increasing Upward Pressure on US Treasury Yields

Concerns over the fiscal health of the United States have been identified as one of the main reasons for the recent rise in treasury yields. Economist Park explained that fiscal instability in the United States, along with concerns over the fiscal health of advanced nations such as France, the United Kingdom, and Japan, are factors keeping treasury yields at high levels. In particular, as bonds issued during past low-interest rate periods reach maturity and are rolled over into new bonds, they must be issued at higher rates, creating a structure where the United States' interest expense burden inevitably increases.

Changes in the composition of investors are also acting as a variable that increases upward pressure on interest rates. In the past, the main investors in US treasuries were public institutions such as central banks, but recently, these have been trending toward reducing their weight in US treasuries and increasing their weight in alternative assets, including gold. Instead, private investors, individuals, and ETFs are establishing themselves as major investors in US treasuries. These private investors are analyzed to be more sensitive to interest rates compared to public institutions, so they are highly likely to demand higher interest rates if the fiscal conditions of the United States become unstable.

Relative Advantage of the Stock Market Based on AI Corporate Profits

Since a rise in treasury yields means a fall in bond prices, it can be a burden for private investors who must consider capital losses. Generally, when treasury yields are high, investment opinions on stocks are adjusted, but economist Park evaluated that stocks are still a better investment asset than bonds. This is because the profit outlooks for AI and semiconductor companies are very good.

As the third-quarter earnings season begins, expectations for profit improvement in AI companies are rising, and it is explained that this profit growth is expected to offset the discount rate burden caused by high interest rates. However, it was concluded that the absolute attractiveness of stocks itself is not extremely high, but rather that they hold a relative advantage over bonds in terms of corporate profits offsetting the headwinds of high interest rates.

Source: original video (YouTube)