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If you’re late to the finger-pointing game, just know that the 10-year Treasury yield is to current market jitters what Indonesia is to the haze. (You can skip to the next section if you’ve hit your mansplain limit for the week.)
The long-term yield, a global proxy for the cost of money, is simultaneously a reason and indicator that people are “repricing risk”, especially where artificial intelligence is concerned.
This term, to grossly simplify it, is a five-dollar phrase for investors and lenders wanting to be compensated more for holding stocks or bonds than they did before because their own risk calculus has become more demanding.
The yield, which currently hovers at about 5.1 per cent, is “actually slightly below average”, Jenny Johnson, Franklin Templeton’s president and CEO, pointed out to BT last week. Since the 1950s, this figure has actually averaged 5.52 per cent.
That might be true, but what is spooking investors now is not so much the nominal yield figure but more the violence with which that yield has shot up. This time last year, the 10-year Treasury yield was only 4 per cent.
When the cost of capital gets expensive quickly and for worrisome reasons, investors have to scramble to recalculate their own risk tolerance too.
So, last week’s selldown was what that scrambling looked like.
An expensive and narrow rally
Even beyond chip stocks and interest rates, large parts of the local stock market are looking objectively expensive. Across recent stock downgrades, rich valuations have been a common analyst bugbear.
Sheng Siong, for instance, was deemed one of the region’s “most expensive food retailers” on a forward price-to-earnings basis, while JMSEA’s own downgrade came as the stock traded near an all-time-high net asset value premium of 31 per cent.
And even after the recent bank stock selldown, the local trio’s valuations “remain rich”, BT’s Ben Paul observed last week.
“Tellingly, neither DBS nor OCBC resumed their share buybacks in the wake of last week’s sell-off,” he added.
At the same time, the Straits Times Index’s year-long bull run has been a worryingly narrow one.
In downgrading SGX last week, DBS Group Research “raised concerns over the quality and sustainability of equity turnover, citing an increasingly narrow market rally”, BT’s Shikhar Gupta pointed out.
Securities daily average value on the exchange for Q1 FY2027 might be up year-on-year, but has fallen 8 per cent quarter-on-quarter. Meanwhile, Singapore’s three local banks made up 33 per cent of market turnover in September, up from 26 per cent a year earlier.
It isn’t ideal to have a monster stock market rally intertwined with the fate of a mere handful of stocks. The Koreans would know – the Kospi Index is down 22 per cent in H2 this year thanks to a violent selloff in their two dominant counters: Samsung Electronics and SK Hynix.
What’s the market trying to tell us?
“The market has spoken,” DBS CEO Tan Su Shan said in an interview last week.
“It’s not a bad thing because now, people are asking for higher returns…They’re making sure that whatever money is now being hoovered into the whole AI capex ecosystem will lead to some kind of long-term ROI that can then be repaid back to debt or bond or equity holders.”
Whatever the market is saying now, it might start saying it a whole lot louder. Between high oil prices and the US’ growing debt burden, the 10-year Treasury yield risks hitting 6 per cent for the first time since 2000, bond giant Pimco reckons.
For now, the inflection number to watch out for is 5.9 per cent – that is how high the yield has to be before investors start flipping from stocks to bonds, according to Bank of America’s latest funds manager survey.
By that point, the market will be practically hollering at us. Investors will need to be real careful what they choose to hear
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