Treasury Yields Soar, Even Trump Would Struggle to Stop It

Japan has emerged from a long period of deflation and is facing inflationary pressure, which could lead to an interest rate hike. If the Bank of Japan raises interest rates, fear could spread due to the uncertainty this would have on the market.

In this situation, if the United States continues its tight monetary policy, the unwinding of the yen carry trade—where investors borrow low-interest yen to invest in high-interest assets—could accelerate. If yen carry funds return to Japan, it could trigger massive sell-offs in the U.S. bond and stock markets, significantly impacting financial markets. Jeon In-gu stated, "This time, they might have to raise rates significantly. This damage means there will be no shield. I believe a moment could come when the seriousness of the U.S. translates into fear."

The current high oil price situation is more severe than during the Russia-Ukraine war, posing a significant burden on the U.S. government. The Biden administration, ahead of the midterm elections, has limited policy options to curb rising oil prices.

If a strong confrontation with Middle Eastern countries continues, it could lead to a loss of public support. The current government's concerns are deepening given that rising prices are a decades-long global trend leading to government change. Jeon In-gu stated, "It has been a global trend for decades that governments that touch prices are usually replaced."

As the Democratic Party is likely to fare well in the midterm elections, interest in sectors that could benefit from Democratic policies is growing. In particular, solar, wind, and secondary battery sectors are emerging as promising investment opportunities.

There are currently related stocks with relatively low prices, and some analyses suggest that the negative impact of macroeconomic factors may be relatively less during the AI technology revolution. Jeon In-gu said, "If I were to invest looking at next year, I would consider solar, wind, and secondary batteries. There are some stocks whose prices are currently low."

The US national debt problem is far more structural and severe than the case of former UK Prime Minister Truss. The government must implement long-term austerity measures to make the national debt sound, but such austerity could lead to other problems.

Prolonged austerity raises concerns that the US could fall behind in the artificial intelligence (AI) competition or that its military power could weaken. Particularly, if Treasury yields exceed 5%, there is a risk of severe damage to the entire US financial system.

Consequently, the US is not expected to be able to sustain strong austerity policies even after the midterm elections. Jeon In-gu explained, "The US needs long-term austerity until the national debt becomes sound, which is the correct answer. But when that long-term austerity happens, the US could fall behind in the AI competition."

To cope with the current high interest rate and high inflation environment, we need to return to investment methods similar to those of 2022. This involves a strategy of adequately securing defensive stocks and dividend stocks, and selectively investing only in growth stocks with strong cash flow.

Companies with low exposure to high interest rates and high inflation should be preferred, and companies holding a lot of cash can actually benefit in this high-interest rate environment. Jeon In-gu emphasized, "We need to return to the 2022 investment method. Keep a sufficient proportion of defensive stocks and dividend stocks, and only buy growth stocks with good cash flow."