According to the Financial Association on November 21 (Editor: Xiaoxiang), the recent surge in US bond yields over the past few weeks is it bullish or bearish for the stock market and other risk assets? The global asset management giant PIMCO now tends to see it as the former...

PIMCO stated in a recent report that the divergence in US stocks and bonds markets reflects that investors can continue to increase their allocation to risk assets. The institution believes that as inflationary pressure eases and US economic growth slows, the negative correlation between US stocks and bonds has been restored.

PIMCO portfolio managers Erin Browne and Emmanuel Sharef wrote in the report that amid falling inflation and GDP growth, the positive correlation between stocks and bonds tends to weaken and then turn negative, similar to the situation currently faced by the USA and many other major economies.

The report suggests that investors can currently increase and expand their allocation to risk assets in pursuit of potentially higher returns, while the overall volatility of the portfolio is unlikely to increase significantly.

Market data shows that as of this Tuesday, the Bloomberg US Aggregate Bond Index has an ROI of about 1.6% this year, indicating a substantial narrowing of gains in recent weeks. However, the recent sell-off in US bonds has had little impact on US stock trends, with the s&p 500 index having risen by 24% so far this year.

PIMCO wrote in the report, "In portfolio construction, stocks and bonds can complement each other, and in a scenario of central bank interest rate cuts, both may benefit from our fundamental economic scenario assumption — a soft landing."

In terms of cross-asset portfolios, PIMCO currently leans towards slightly over-allocating US stocks, while preferring high-quality core bonds, typically including investment-grade bonds. PIMCO also noted that given Trump's plans to raise tariffs, investors should focus on US companies whose earnings do not heavily rely on imports. Companies expected to benefit from the new government's proposed tax cuts and deregulation will be a good addition to the portfolio.

Browne and Sharef also indicated that allocating to inflation-linked bonds or other physical assets may help hedge against the potential risks of rising inflation pressures caused by fiscal policy or tariffs.

They added: "Lower or negative correlation between stocks/bonds can achieve complementary and more diversified cross-asset allocation, especially for those who can use leverage."

On Wednesday, the benchmark 10-year USA Treasury yield hovered around 4.4%, having increased by more than 75 basis points from the year-to-date low of 3.6% reached in mid-September. The real rate, measured by the yield of USA 10-year Treasury Inflation-Protected Securities (TIPS), has jumped from around 1.5% in early October to just above 2%.

According to CME Group's FedWatch tool, traders currently see a 54% chance that the Federal Reserve will cut rates by 25 basis points in December, with only a 15% chance of another 25 basis points cut in January.

Many market participants are still waiting for clarity on Trump's policies and the next wave of employment and inflation data that could impact Federal Reserve policy.

Michael Lorizio, head of USA interest rate trades at Manulife Investment Management, stated, "It seems we will have to wait until the next non-farm payroll and next CPI data are released to truly see the impact of economic data on the Federal Reserve."

Editor / jayden