US Treasury Yields at 6% Signal Credit Crisis... Concerns of 20% Plunge in New York Stock Market – Bloomberg

[Block Media Reporter Lee Jeong-hwa] The yield on the US 10-year Treasury bond has soared to nearly 5.4%, the highest level since 2002. While large tech stocks related to artificial intelligence (AI) are driving the rise in the New York stock market, the impact of high interest rates is spreading across small and mid-cap stocks and the corporate bond market. Wall Street has warned that a credit crisis could occur if Treasury yields reach 6%.

Bloomberg reported on the 9th (local time) that the surge in US Treasury yields and rising international oil prices are worsening the investment environment across financial markets. With Brent crude oil prices exceeding $100 per barrel, concerns about prolonged inflation are also growing. Not only in the US, but borrowing costs in the UK have reached their highest level in 19 years, and pressure is mounting on French government bonds as well.

A Credit Crisis at 6% Treasury Yields... Possibility of S&P 500 Falling Over 20%

Manish Kabra, a strategist at Société Générale, warned that the rise in Treasury yields could lead to credit issues in the financial system, beyond just a burden on stock valuations.

Kabra stated, "A 5% Treasury yield is a headwind for stock valuations, but at 6%, we should expect credit events to occur."

He analyzed that credit issues are more likely to arise in the public finance sector, where debt burdens are greater than in the private sector. He further explained that the current market's main concern is focused on the fiscal stability of governments and the sustainability of national debts.

In a recent report, Société Générale's Manish Kabra, Charles de Boissonneau, and Kautar Mamouni presented scenarios for the stock market based on Treasury yields and oil prices.

They assumed a scenario where the US 10-year Treasury yield reaches 6% and international oil prices rise to $150 per barrel. If the cash flow of large tech companies continues to deteriorate, they forecast that the S&P 500 index could fall by more than 20% next year.

Conversely, if Treasury yields drop to around 4% and oil prices fall to $80 per barrel, they assessed that there would be room for further increases. However, they added that this would require improvements in the fundamentals of large tech companies.

James Saint-Oven, Chief Investment Officer (CIO) at Ocean Park Asset Management, also emphasized the tightening effects of the bond market. He pointed out that the market capitalization-weighted S&P 500 index is masking significant damage occurring within the market.

He explained, "The bond market is effectively tightening financial conditions without any additional actions from the Federal Reserve (Fed)."

He particularly expressed concern that shocks in energy prices could lead to deteriorating corporate performance. He assessed that the stock market has not yet fully reflected these risks. In fact, the yields on bonds issued by companies with low credit ratings have reached about 15%. This poses a significant burden for companies that need to refinance existing debt.

The credit spread of US high-yield corporate bonds is also widening. Exchange-traded funds (ETFs) investing in speculative-grade bonds are nearing the levels seen during the sell-off in the spring of last year due to tariff disputes.

CIO Saint-Oven described the credit spread of speculative-grade corporate bonds as "a true indicator of fear." He expressed concern about the trend of widening spreads since mid-September. His firm reduced its investment in credit-sensitive assets, including high-yield bonds, as their internal analysis model confirmed a downward trend in assets vulnerable to rising interest rates.

Only AI Giants Holding Up the Stock Market... Rising Rates Could End the Uptrend

The impact of high interest rates is clearly evident within the stock market. The S&P 500 index recorded an all-time high this week, but the breadth of advancing stocks has become extremely narrow. At the time of the record high, only 30% of the constituent stocks were above their 50-day moving average.

This is the lowest level among all-time highs since Bloomberg began compiling related statistics in 1990.

The Russell 2000 index, which focuses on small and mid-cap stocks sensitive to interest rates, has fallen for five consecutive weeks. The decline from its peak has expanded to about 8.5%. The percentage of constituent stocks above their 50-day moving average is only 27%.

Real estate-related stocks have also continued to decline. In contrast, the S&P 500 and Nasdaq 100 indices rose, buoyed by the strength of large tech stocks.

Jeff Mulencamp, a fund manager, has responded to this market environment by increasing his allocation to energy-related stocks and nearly selling off all AI-related holdings. The fund he manages has a size of $270 million and has outperformed the S&P 500 index this year.

Mulencamp stated regarding the AI investment frenzy, "I would gladly leave the party while it’s still going on." He warned, "Funding is still possible for now. But if that runs out, the game will be over."

The deterioration in corporate funding conditions is also affecting the new listing market. Lynn Martin, president of the New York Stock Exchange (NYSE) Group, pointed to high interest rates as the background for the postponement of major companies' listing schedules.

So far, the shock from Treasury yields has not led to a sell-off in risk assets across the financial markets. Investors are responding by reducing their exposure to bonds with high credit risk and investment strategies vulnerable to interest rate fluctuations.

However, experts' warnings point in a common direction. The rise in Treasury yields could increase corporate funding costs and pressure performance, which could shake the upward trend of the stock market centered on large tech stocks.

In particular, if Treasury yields reach 6% and oil prices hit $150 simultaneously, it could test not only the stock market but also the sustainability of national debts and the stability of the credit market.

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