The 5% Yield Era is Here
Chart of the Week:
US Slashes Budget Spending, Bets Big on Record US$1.5tn Defense Outlay
With U.S.-Iran geopolitical tensions unlikely to fade, President Trump recently unveiled the FY2027 budget proposal, highlighting the administration’s strong push for fiscal reform. The proposal cuts healthcare and public service spending, while trimming discretionary outlays on diplomacy, education, and environmental protection by about 10%. At the same time, it sharply expands defense spending, lifting the total defense budget to around US$1.5tn, a record high and up about 40% YoY. This could drive demand for modern military and AI-related technologies, including fighter jets, naval vessels, missile systems, drones, and encrypted communications. Closer U.S. military allies may also see more technology transfers and cooperation. Together with tariff protection and lower regulatory costs, this should support the reshoring of manufacturing to the U.S.
Major Recap 1:
US-Iran Ceasefire Eases Supply Risks, Sector Momentum Drives Equity Gains
The US announced a two‑week ceasefire with Iran and proposed a 10‑principle peace plan, easing market concerns over supply disruptions from a potential Strait of Hormuz blockade. Oil prices fell sharply and Treasury yields declined, boosting risk appetite and alleviating valuation pressures on technology stocks, which in turn lifted global equities—most notably the Philadelphia Semiconductor Index surged. Although final peace negotiations remain challenging and differences in proposals persist, if the strait gradually reopens and oil prices fail to break prior highs, markets may interpret that the peak of geopolitical risk has passed. Attention would then shift toward U.S. earnings season, led by the financial sector, with profit growth momentum becoming the focal point for capital flows.
Major Recap 2:
Ceasefire Lifts Bonds and Precious Metals; Watch Israel Strikes for Renewed Risks
Cooling Middle East tensions supported bond markets, with investors focusing on the Fed’s March meeting minutes. Officials discussed a “higher-for-longer” rate path during the conflict and did not rule out further hikes to counter war-driven inflation, highlighting two-sided risks. The Fed is likely to hold policy steady while monitoring incoming data. As tensions ease and oil prices decline, inflation concerns and rate hike expectations have moderated; upcoming CPI data will be key to assess inflation resilience.
What’s Trending:
Earnings Revisions Ahead of Reporting Season, Reinforcing Mid-to-Long-Term Tech Upside
As the earnings season approaches, analysts remain constructive on 1Q26 profit outlooks, with S&P 500 earnings growth estimates revised up from 12.8% at the start of the quarter to 13.2%. Among sectors, Information Technology saw the largest upward revision (+10.7%), supported by continued AI infrastructure buildout and capex momentum. Energy also posted strong upgrades (+8.6%), driven by higher oil prices boosting sector earnings.
In Focus 1:
USTs Lag YTD, but Geopolitical Tensions Offer Buying Opportunity
Bond market returns have shown a clear direction YTD. In detail: (1) U.S.-Iran tensions have lifted inflation expectations, pushing both short- and long-end Treasury yields higher; (2) lower-rated bonds (e.g., HY) benefited from shorter duration and higher yields, but CCC and below saw notable declines. With the Fed likely to remain on hold in the near term and markets transitioning between rate and credit risks, investors may adopt a barbell strategy to avoid concentration risk while locking in high coupons to build stable future cash flows.
In Focus 2:
Asymmetric Risk-Return in Bonds Favors Locking in Yields at Higher Levels
From a breakeven analysis of U.S. bonds: (1) assuming a 50 bps rise in yields, total return (including coupon) for IG bonds with maturities over 20 years would decline by nearly 5%; conversely, if yields fall by the same magnitude, total return could exceed 10%. (2) IG bonds offer a more attractive risk-return profile than Treasuries, as the current high-rate environment provides a coupon buffer that can largely offset price declines and capital losses from rising yields, highlighting stronger downside protection and resilience.
