With the 10-year US Treasury yield breaking above 5% and reaching its highest level in nearly two decades, market watchers are questioning whether the traditional inverse relationship between bond yields and equity valuations still holds. Li Zhao, head of asset allocation research and executive general manager at CICC Research, noted that the negative correlation between Treasury yields and stock valuations appears to have become disconnected. He pointed to gold prices having surged to $5,500 per ounce earlier, even as US bond yields continued climbing during that period.

Li explained that the diminished influence of Treasury yields on asset markets could be attributed to two main factors. First, there may be underlying issues within the US bond market itself, undermining the role of Treasury yields as a pricing anchor. Second, US corporate earnings have been robust enough to offset the negative impact of rising yields.

He further observed that Treasury yields have recently not only stopped influencing the pricing of other assets but have actually begun to be influenced by them. The substantial issuance of credit bonds by major US AI companies to raise capital has crowded out demand for US Treasuries, consequently pushing yields higher.

Li added that the 10-year yield breaching the 5% mark represents a significant psychological threshold for the market, potentially heightening investor anxiety. However, given the reduced pricing-anchor role of Treasury yields, he cautioned against drawing hasty conclusions about their broader market impact at this stage.

In a separate view, Liu Gang, CICC Research's chief strategist for overseas and Hong Kong markets and managing director, highlighted that historical experience suggests rate hikes do not necessarily weigh on Hong Kong stocks. If the fundamental strength of the Hong Kong and mainland Chinese economies can outweigh the effects of US monetary tightening, then interest rate changes may not be the dominant factor driving Hong Kong's equity market performance.

He cautioned, however, that Hong Kong stocks currently lack strong underlying fundamentals, meaning that even a shift toward rate cuts by the US Federal Reserve may not provide the boost some investors hope for. Nonetheless, Liu emphasized the importance of distinguishing between aggressive, sustained rate hikes and modest, temporary increases. A more dovish approach to tightening would likely have only a brief impact on Hong Kong stocks, with the negative effects largely dissipating once the rate decision is announced.