CEO House View | Stocks Rebound, Yields Hit New Highs, but the Dollar Weakens: Making Sense of the Divergence

💡The recent concern over US and global debt sustainability in financial markets is driven by several factors, including rising US long-term Treasury yields, a weakening dollar against the trend, and a sharp rebound in gold. These indicators collectively point to renewed market worries about the sustainability of US and global debt, as well as the pressure from increased bond issuance from both corporations and governments.

💡AI infrastructure bond issuance has significantly impacted demand for long-duration government bonds this year by approaching US$500 billion, with major CSPs contributing nearly half, around US$220 billion. This figure is substantially higher than last year's US$12.5 billion. The weighted average issuance maturity reaching approximately 15 years directly dilutes demand for long-duration government bonds, contributing to rising long-term yields.

💡The Federal Reserve will likely maintain current interest rates in September due to temporarily safe inflation data. The core PCE rose 0.25% MoM and held steady at 3.3% YoY in July, while August core CPI is projected to rise 0.2% MoM, with YoY growth holding steady at 2.47%. These figures suggest that the immediate pressure for a rate hike has not materialized.

💡Asian currencies like the Korean won and Taiwanese dollar might appreciate in the second half due to several factors. The Bank of Korea initiated Asia's rate-hike cycle by raising rates by 25bp in July, leading to the Korean won surging by more than 5%. Taiwan's real interest rate is significantly low while GDP is growing at a double-digit pace, increasing the probability of a 50bp rate hike, thus accumulating momentum for appreciation.

💡Rising long-term bond yields in the US and Japan reflect current market pressures stemming from continued debt issuance by both corporations and governments. US 30-year Treasury yields have broken above 5.2%, and Japan's have surpassed 4%. This trend indicates increased supply of long-term debt, which dilutes demand and raises the cost of financing, alongside rising term premiums and widening stock-bond spreads.

💡The 'R < G' formula, where 'R' represents the cost of financing and 'G' represents nominal economic growth, relates to debt sustainability by indicating that as long as economic growth is strong enough, it can absorb the pressure from interest rates. This formula highlights that debt is sustainable if a country or company has sufficient capacity to repay its debt through robust economic expansion, spending cuts, or improved bond liquidity.

💡Strong economic fundamentals in the US and Taiwan help absorb debt and interest rate pressures by ensuring sufficient capacity to repay debt. In the US, balanced employment supply and demand, low initial jobless claims, and new highs in real consumer spending on goods and services demonstrate robust growth. Taiwan's manufacturing cycle is upward, and exports are projected to maintain over 40% growth, providing strong economic expansion to counter financing costs.

💡MacroMicro suggests avoiding long-term bonds while recommending gold allocation because of the overarching major debt cycle and concerns over debt sustainability. The three major risks—long-term bond liquidity, increased debt issuance pressure, and market volatility—reinforce this framework, making long-term bonds less attractive due to diluted demand and rising yields, while gold's rebound confirms its value as a hedge against debt concerns.

💡US federal debt has surpassed US$40 trillion, and the impact of increased government debt issuance, alongside corporate debt, is the continued rise in long-term bond yields. This issuance dilutes demand for existing bonds, increases the cost of financing, and contributes to rising term premiums and widening stock-bond spreads, increasing the opportunity cost of investing in equities.

💡MacroMicro views potential market pullbacks in September as buying opportunities rather than signals of a trend reversal because the underlying economic fundamentals remain strong and intact. Despite short-term risks from bonds, interest rates, and FX, robust growth momentum, an upward manufacturing cycle, and a balanced labor market indicate that these disturbances will ultimately fade, allowing the market to return to fundamentals.