In the era of high yield pivot, real interest rates are more important than nominal interest rates. Last night, we compared the market situation in August with that in April and May. As of today, both oil prices and US10y have broken through the recent upper limit of the range. The long-term manifestation of the game of rising oil prices, today here https://((x.com))/qinbafrank/status/208953861047639947? We have talked about s=46&t=k6rimWs Ebo2D2TXolYcM-A. Now let's talk about US10Y. It should be emphasized that I have always focused on the trend of 10-year US bond yields, rather than 20 and 30 years, because the 10-year US bond yield is the true risk-free rate (5 years is too short, 20 and 30 years is too long, 10 years is just right). Let's talk about a few points: 1. Why are we ushering in the era of high yield pivot? The reason for the 10-year US Treasury yield rising to 4.74% is even more complex. On the one hand, it is naturally due to the rise in oil prices and the increase in inflation expectations. However, the expectation of interest rate hikes has significantly decreased recently, and the US10Y has not continued. I have previously discussed that the current rise in long-term bond yields is not only driven by inflation expectations, but also by the increasing scale of bond supply On the one hand, as the US fiscal deficit rises and issuance supply increases, the market begins to anticipate future deficits, maturity risks, buyer price sensitivity, and long-term refinancing pressures; On the other hand, driven by the AI infrastructure wave, large technology companies are also issuing more and more bonds this year, which is actually competing with U.S. treasury bond for the duration risk budget of pension, insurance funds, sovereign funds and other investors, making new bonds must provide higher yields or wider credit spreads; All of these have led to high long-term returns, that is, an increase in the central yield. 2. Of course, it's not that bond supply has exploded. The yield can only rise and cannot fall. ” 1) If there is a significant economic slowdown, a decrease in inflation, or a substantial interest rate cut by the Federal Reserve in the future, the average short-term interest rate expectation of 3.43% can still significantly decrease, thereby offsetting the term premium. 2) The market is evaluating the ROIC of AI capital expenditures. In the past, big technology relied on operating cash flow financing, but now it increasingly relies on bonds, leasing, project financing, and other capital structures. As long as AI revenue and cash flow are realized, issuing bonds will not only increase interest rates but also future profits. These two forces can offset each other: the better the quality of operations, the lower the natural bond yield will be. But in the future, if income realization is slower than capital expenditures and interest costs, it will result in a triple compression of bond supply pushing up the discount rate, free cash flow decreasing, and ROIC being lowered. So big tech debt financing may not only increase the market's profit capacity, but may also lower the market's tolerance for high interest rates in the future. 3. Why hasn't the 4.7% 10-year US Treasury yield put tremendous pressure on the market industry? From a personal perspective 1) The profit growth rate is higher than the stock price increase rate, and the valuation is being digested by profits. That's why the 10-year US Treasury yield, which is also 4.7%, can now have a smaller impact on the index than last year. 2) Partial valuation compression and industry switching have been completed within the market High interest rates do not "do not cause harm", but rather harm first occurs in high valuation sectors, small cap growth stocks, REITs, and utilities; Companies with high debt and the need for continuous refinancing; Long term assets with cash flow forward conversion. Simply put, the market has differentiated and funds are concentrated in the more profitable semiconductor, some large technology, finance, energy, and industrial sectors, 3) There is currently no systemic pressure signal from the credit market As of mid August, the OAS of US investment grade corporate bonds is still only 80 basis points, while the OAS of high-yield bonds is 267 basis points, which is still at a relatively tight level overall. As long as the credit spread does not significantly widen, although the full range financing costs of enterprises are high, they have not yet transformed into credit accidents and systematic deleveraging. So currently, the market can withstand 4.7%, relying on the upward revision of profits, stable credit spreads, and early compression of some valuations. Of course, there is also today's Bank of America report https://((x.com))/qinbank/status/2089561759770427439? As mentioned in s=46&t=k6rimWs Ebo2D2TXolYcM-A, the market also believes that the government will use higher nominal GDP growth to digest the debt problem. This is also a factor, personal perspective, and fundamental profit growth is still the top priority. 4. Red line turns yellow, pressure zone moves upward, market tolerance range deduction Last year here https://((x.com))/qinba frank/status/19258712119296629? S=46&t=k6rimWSEbo2D2TXolYcM-A mentioned an observation that 4.6% is the threshold for the ten-year US Treasury yield, and the greater the market pressure and the more nervous the Ministry of Finance is when it exceeds this threshold. But now this threshold is also changing. Provide a framework for personal observation 1) 4.60% -4.75%: High interest rates but still manageable This was the red line in the past, now it's closer to the yellow line. As long as profits continue to rise, credit spreads remain stable, and yields slowly increase, the overall market can bear it. 2) 4.75% -4.90% obvious valuation friction zone This interval market is more prone to: index sideways, profit digestion valuation; Rotating from growth stocks to value stocks and cyclical stocks; The market width has deteriorated; The requirements for profit quality and free cash flow have significantly increased after the financial report. This stage does not require a significant drop in the index, but internal pressure will increase. The more severe the differentiation 3) 4.90% -5.05%: New true stress zone In this range, market volatility naturally increases. If it rises rapidly by 30-40 basis points in two or three weeks, and real interest rates, term premiums, and credit spreads rise together, the market does not need to wait for more than 5% to adjust. 4) 5.05% or more and lasting for several weeks: red alert area Using the simplified reciprocal valuation method, the profit to return ratio increased from 5.0% to 5.3%, the price to earnings ratio decreased from 20 times to 18.9 times, and the valuation compressed by about 5.7%; Rising to 5.5%, P/E ratio drops to 18.2 times, valuation shrinks by about 9.1% Of course, this is only a rough deduction, and the framework is more worthy of reference than specific numbers. 5. The real core is the real interest rate, not the nominal 10-year yield For growth stocks, real interest rates are more important than nominal returns, for example: 10-year nominal yield of 5.0%, inflation expectation of 2.7%, and real interest rate of 2.3%; The 10-year nominal yield is 4.9%, inflation expectations are 2.2%, and the real interest rate is 2.7%. The second scenario may actually be more unfavorable for overvalued growth stocks. The so-called good interest rate increase refers to the synchronous upward revision of economic growth, productivity, and profit expectations; If bad interest rates rise, it means that economic data has weakened, but fiscal deficits, bond supply, and term premiums are still pushing up the long end. The short-term tolerance range for 10-year returns in the market is moving upwards, with 4.7% no longer being the hard red line and 4.9% -5.0% becoming the new pressure boundary. The high-yield center brings high volatility This article is sponsored by @ bitget_zh, titled 'Bitget Buying US Stocks: Instant Entry, Smooth Trading'