NH Investment Says Treasuries Losing Safe-Haven Role Makes Stocks More Attractive

U.S. Treasuries are no longer serving effectively as safe-haven assets that protect portfolios from risk, making stocks more attractive investments than bonds, according to NH Investment & Securities.

In a Sept. 18 report, NH Investment & Securities said supply pressure in the U.S. Treasury market is mounting and stocks and bonds are increasingly moving in the same direction. Rising yields have boosted bond income, but they have also increased price volatility, giving bonds characteristics closer to risk assets.

Ha Jae-seok, an analyst at NH Investment & Securities, wrote that the recent increase in stock-bond correlation has weakened Treasuries' ability to offset declines in the equity market. Supply pressure in the U.S. Treasury market and the weakening of their safe-haven function are leading to a higher term premium, he said. The term premium is the additional yield investors demand for holding long-term bonds in return for taking on risks such as interest-rate fluctuations.

Ha said the term premium on U.S. Treasuries has risen recently, though it remains below its long-term average. As interest rates are likely to remain a factor driving volatility in financial markets, the term premium may rise further, strengthening bonds' risk-asset characteristics.

By contrast, the U.S. stock market has maintained solid corporate earnings expectations despite higher rates. Earnings forecasts for S&P 500 companies continue to be revised upward, and short-term rates, which are more sensitive to monetary policy, are lower than they were in 2023, when the yield on the U.S. 10-year Treasury was at a similar level.

Ha said there is also no clear correlation between the term premium and stock-market valuations. That makes it difficult to conclude that equity valuations will fall simply because interest rates are high. He added that stocks are likely to remain relatively more attractive than bonds.