US 10-Year Treasury Yield Becomes a 'Fear Index'

[Asia Economy Reporter Junho Hwang] The yield on the U.S. 10-year Treasury note has transformed into a fear index. When yields rise, the stock market plunges, and when yields fall, it rises again, making it a barometer for the stock market's direction. However, if this yield surpasses the 10-year expected inflation rate, it can serve as evidence of economic recovery and act as a turning point for the stock market, according to an analysis.

Jaeman Lee, a research analyst in equity strategy at Hana Financial Investment, analyzed the correlation between market yields and the stock market in a report titled "How and Who Will End the Fear" on the 7th.

According to Lee, looking at past cases, the stock market faced downward pressure even when the U.S. 10-year Treasury yield was below expected inflation. However, the situation changed once the yield exceeded expected inflation.

In 2013 and 2016, the U.S. 10-year Treasury yields were lower than expected inflation, but starting in the second quarter of 2013 and the third quarter of 2016, Treasury yields began to rise, narrowing the gap with expected inflation. During this process, the stock market experienced corrections. However, once yields surpassed expected inflation, the stock market rebounded from that point and entered a rising phase. This was because the rise in yields was interpreted as "economic recovery." In such cases, a shift in central bank monetary expansion policies can also gain legitimacy. If yields fall again, it can be seen as a phase of economic deterioration, which could negatively impact the stock market.

Additionally, Lee stated, "During periods of rising yields like recently, price-to-earnings ratios (PER) tend to decline significantly. At such times, it is necessary to find sectors where PER can decline relatively quickly in a phase of earnings growth, thereby justifying the decline."

He continued, "Since 2012, the representative sectors in the domestic stock market where PER has declined relatively quickly during earnings growth are IT hardware and semiconductors," adding, "These two sectors have seen earnings estimates adjusted upward relatively quickly until recently, so the degree of PER decline has been relatively large."