NH Securities: Stocks Outperform Bonds Amid Rising Risk

NH Securities has shifted its stance, declaring stocks superior to bonds for investors. The firm cites a breakdown in the historical negative correlation between equity and bond markets. Since 2022, the two asset classes have moved in tandem more often than not.

This synchronization weakens the portfolio hedging function of bonds. Consequently, the risk premium required to hold government debt is rising. Analysts at NH Investment and Securities argue that bonds now carry a stronger risk asset profile than previously assumed.

Erosion of Bond Hedging Utility

Researcher Ha Jae-seok notes that bond prices frequently fall alongside rising stock volatility. This behavior strips bonds of their role as a safe haven. The traditional expectation that bonds offset equity losses is no longer reliable.

The firm identifies supply and demand pressures as key drivers of this shift. Major economies face rising liability burdens. Large technology companies are issuing ultra-long corporate bonds to fund artificial intelligence infrastructure.

Rising Term Premia in US Debt

The term premium on US government bonds is increasing. This metric represents the extra compensation investors demand for holding long-term debt. Ha describes the recent rise as a normalization of previously low risk premiums.

Demand from major overseas buyers, including Japan and China, has declined. These entities were once primary purchasers of US Treasuries. The reduced demand exacerbates the supply pressure on the market.

Equity Valuations Remain Supported

Corporate earnings for the S&P 500 continue to receive upward revisions. These forecasts have improved consistently since the start of the year. The expansion of AI investment is expected to drive further earnings growth.

NH Securities points to a lower two-year yield compared to 2023. This suggests that monetary policy risks are currently contained. No clear correlation exists between rising term premia and S&P 500 valuations.

The firm concludes that a rise in the 10-year yield will not necessarily trigger a stock market decline. Stocks maintain a relative investment edge over bonds. This advantage is expected to persist through next year.