U.S. Treasury Yields Surge to 19-Year High! How Should Investors Protect Themselves? Ruan Mu-Hua Highlights 'Four Major Warnings': These Three Assets Will Be Hit First

Market expectations that the U.S. Federal Reserve (Fed) will further raise interest rates in October have intensified, causing U.S. Treasury yields to spike again on the 23rd. The 10-year Treasury yield climbed to 5.113%, hitting its highest level since 2007. According to financial expert Ruan Mu-Hua, this surge is not due to uncontrolled inflation expectations but rather reflects the fact that 'funding has regained its price.' He urges investors to closely monitor four upcoming developments.

Ruan noted that on September 23, the 10-year U.S. Treasury yield jumped nearly 15 basis points (bps), closing at 5.113% and briefly approaching 5.14% intraday—the highest since July 2007 and the largest single-day gain in over a year. On the same day, the 5-year yield surpassed 5% for the first time since 2007, while the 30-year yield rose to 5.4%, marking the highest closing level since 2004. The entire yield curve shifted upward simultaneously. 'This is not a technical jump in a single maturity segment, but a comprehensive repricing of funding costs,' he said.

Ruan emphasized that the key issue is not 'how much yields rose,' but 'which part rose.' Nominal yields can always be broken down into two components: real interest rates and inflation expectations. On that day, the 10-year breakeven inflation rate rose only about 2 bps. This means that over 12 bps of the nearly 15 bps increase came from real interest rates. The market’s pricing signal is therefore very clear: this is not runaway inflation expectations, but a reassessment of real funding costs.

What forces are driving the sharp rise in U.S. Treasury yields?

Ruan identified three concurrent forces:

First is growth: S&P Global's preliminary September U.S. PMI showed the private sector expanding at its fastest pace in over five years, with economic momentum far exceeding expectations.

Second is policy: The Fed raised interest rates last week for the first time in three years, lifting the target range to 3.75%–4.0%. Strong economic data immediately reinforced bets on further rate hikes before year-end. The 2-year yield jumped 14 to 16 bps that day, directly reflecting the market’s repricing of the policy path.

Third is supply: Massive government bond issuance, combined with AI-related firms entering the bond market to raise capital—SoftBank’s issuance of $11 billion in high-yield debt to invest in OpenAI being one example—has collectively pushed up term premiums at the long end of the curve.

Is the U.S. economy facing tightening, not inflation? Gold’s weakness is evidence

Ruan explained that using the cross-matrix of real interest rates and inflation expectations, the current situation falls squarely into the 'rising real rates, stable inflation expectations' quadrant. This condition is called 'tightening,' not 'stagflation.' True stagflation signals occur when breakeven inflation spikes while real rates fall—a scenario opposite to what we’re seeing now.

Gold’s performance that day provided supporting evidence: prices fell to around $4,322 per ounce. If this yield surge were driven by inflation fears, gold should have strengthened. Instead, gold weakened while the dollar strengthened, confirming that the dominant force is rising real rates and the opportunity cost of holding non-yielding assets.

For equities, Ruan stressed this is a 'compression of valuations,' not an 'earnings collapse'—and the responses to these two scenarios differ fundamentally. On that day, the S&P 500 dropped 0.6% to 7,715.75, and the Dow Jones fell 312 points, with capital clearly rotating out of highly valued growth stocks. With risk-free yields above 5.1% and the S&P 500’s estimated earnings yield hovering around just over 4%, the equity risk premium has effectively turned negative. This implies that for indices to continue rising, the only path left is earnings surpassing expectations; the era of P/E expansion driving gains has temporarily ended.

With major U.S. bond volatility, what should investors watch?

Ruan emphasized four things investors must monitor going forward:

First, the pressure sequence on long-duration assets: With the 30-year yield breaking 5.4%, higher discount rates will hit hardest those assets whose cash flows are concentrated in the distant future. Unprofitable growth stocks, REITs, and highly leveraged small-cap stocks will react first.

Second, the financing chain behind AI capital expenditures: This round of tech investment relies heavily on bond markets. Every step upward in real interest rates forces a recalculation of assumed investment returns. This is the most critical external variable for Taiwan’s electronics supply chain to track.

Third, whether breakeven inflation begins to catch up: Currently, it has risen only 2 bps and remains anchored. However, if oil prices rise again and inflation expectations begin moving in tandem with real rates, the environment would shift from tightening to stagflation. In that case, the dual sell-off in stocks and bonds would be far more severe than today.

Fourth, credit spreads: When interest rates rise but credit spreads remain stable, it indicates valuation adjustment. But when rates rise alongside widening credit spreads, that becomes a systemic warning sign.

Is the stock market environment actually not bad? Ruan: The risk isn’t high rates, but the speed of change

Ruan pointed out that importantly, a combination of strong economy, Fed rate hikes, and record-high yields is actually far preferable for equities compared to 'weak economy, high inflation.' The real risk isn’t the absolute level of interest rates, but the speed of their rise. A single-day move of 15 bps first shocks highly leveraged positions and quantitative strategies, then feeds back into the real economy. Past 20 years of experience show that markets can usually adapt to high rates, but struggle to absorb rapid rate fluctuations.

In summary, Ruan concluded that double-digit yields signify one simple truth: 'Funding has regained its price.' The valuation logic supported by near-zero interest rates over the past decade is now being gradually dismantled. And this process rarely happens in one go—it typically unfolds in repeated waves and stages.