US Treasury's Safe Haven Role Weakens as Stock Appeal Surpasses Bonds

US Treasuries are no longer effectively serving as a hedge against portfolio risk, leading to increased investment appeal of equities over bonds, according to an analysis. NH Investment & Securities reported on the 18th that supply pressures on US Treasuries have intensified and the correlation between stock and bond prices moving in the same direction has strengthened. While interest income from bonds has risen with higher rates, price volatility risks have expanded, making bonds take on more risk asset characteristics. Researcher Ha Jae-seok of NH Investment & Securities stated that as the correlation between stocks and bonds has increased, the ability of Treasuries to offset stock market downturn risks has weakened. "The supply burden on US Treasuries and the decline in their safe-haven function are leading to higher term premiums," he explained. Term premium refers to the additional yield investors demand for holding long-term bonds while bearing interest rate fluctuations and other risks. Ha noted that while the term premium for US Treasuries has recently risen, it still hasn't reached long-term averages. With rates likely to amplify financial market volatility, the term premium could rise further and bond risk characteristics may intensify. Meanwhile, US stock markets continue to maintain robust corporate earnings outlooks despite rising interest rates. The earnings forecast for S&P 500 companies continues to rise, and short-term rates sensitive to monetary policy remain at lower levels compared to 2023 when the 10-year Treasury yield was similar to short-term rates. Ha stated that "there is no clear correlation between term premiums and stock market valuations," adding that it's difficult to conclude stock valuation levels will decline solely because of high interest rates. He expects the trend of equities having stronger relative investment appeal than bonds to continue.