- The 10Y US Treasury yield at 5% reflects a sharp repricing from cuts to hikes, but more than two Fed hikes by end-2026 are already embedded in market expectations
- This is more likely a policy adjustment than a repeat of 2022: labour-market and wage pressures have moderated, while policy remains restrictive above the estimated neutral rate
- AI infrastructure spending is the key persistent risk, sustaining capital demand, growth and inflation; however, its rate pressure should fade as capex growth normalises beyond 2027
- Do not throw in the towel: we prefer 5–7Y bonds, where carry provides a stronger buffer and upside if growth slows, while avoiding long duration exposed to higher term premium
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When will the pain end? It’s been nothing but bad news for bonds in 2026. Not only did we get an unexpected — but highly inflation-inducing — war in the Middle East, we also had eye-watering capex expansion plans from hyperscalers to fund the AI buildout, resulting in a surge in capital demand. Not wanting to be left out of this inflationary party, President Trump had announced USD5,000 payouts to every US adult should Republicans win the midterms, which by our count numbers above USD1tn in additional budgetary spending with no corresponding plan of where the money is going to come from. The new Fed chair Kevin Warsh is left with little choice but to continue talking tough on inflation, and markets have all but priced in a follow-through of two hikes for the remainder of the year. Right on cue, the 10Y US Treasury yield, despite all the intervention by Treasury Secretary Scott Bessent, touched the psychologically significant handle of 5%.
Not the best time to throw in the towel. If we were reading the pulse of the market right, every nerve in an investor’s body is probably telling them to sell bonds and be done with it; the safe asset surely isn’t behaving as it was meant to. But before relying on baser instincts and crowding for the exits, we find it helpful to take stock of what might be to come instead of basing decisions on fear of what has already happened, lest we become the proverbial general fighting the last war.
Policy hikes are priced in. Firstly, the policy pivot from cuts to hikes has already been fully baked into the cake of market expectations. One needs to look no further than the futures markets to verify this: slightly more than two hikes have been priced by end-2026, with almost another two expected by 2027. We think this leans a bit more hawkish than reality requires. Yes, the persistence of a Middle Eastern war raises the stickiness of inflation, but it often leads to a one-off repricing of crude rather than a continuous grind higher in prices over the next two years. There could also be positive surprises. The brief US-Iran ceasefire in June this year, following the Memorandum of Understanding, led to a c.22% decline in Brent prices within a month, showing the natural tendency for lower prices in the absence of conflict. We must also reiterate the powerlessness of rate hikes to stem supply-side inflation; the Iran war would not magically end just because Kevin Warsh moves the Fed funds rate to 4.5%.
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- Hang Lung Properties21 Oct 2026
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