[Correspondent’s Perspective] What Wall Street’s highest peak obscures

(New York = Yonhap News) Correspondent Lim Soo-jeong = Last week, a rarely seen scene continued in the U.S. financial market.

The Nasdaq and Standard & Poor's (S&P) 500 indices both broke record highs on the 6th (local time) thanks to the strength of technology stocks fueled by the artificial intelligence (AI) craze.

However, the very next day, on the 7th, the U.S. 10-year Treasury bond yield, which determines financing costs in the global financial market, exceeded 5.36% during the day, reaching the highest level in over 24 years.

Just a few weeks ago, the market was weighing the timing of the '5% breakthrough', but interest rates are continuously increasing their highs even after breaking through the psychological resistance line in the middle of last month.

Mohamed El-Erian, a world-renowned financial market analyst from Wall Street, recently described this as “a historic gap in the stock and bond markets.”

The focus was on the fact that the U.S. stock market was strengthening while government bond interest rates were rising sharply (government bond prices were plummeting).

High interest rates usually exert a burden on the stock market. This is because it increases the financing cost of companies and at the same time increases the investment attractiveness of relatively safe bonds.

However, Wall Street is now placing greater value on the future profits that AI will generate than on the rapidly rising cost of capital.

This belief seems reasonable at first glance. In fact, the high profit growth of large U.S. technology companies supports these expectations.

According to Reuters, the net profit of S&P 500 companies in the third quarter of this year is expected to increase by about 31% compared to the same period last year, and large AI-related technology companies are expected to account for about two-thirds of the increase. The net profit growth rate of the U.S. semiconductor industry is expected to reach 136%.

It is also interesting to note that the AI ​​boom, which has boosted the stock market, is cited as one of the causes of the surge in government bond interest rates that has strained financial markets around the world.

Kevin Worth, chairman of the U.S. Federal Reserve, also mentioned the expansion of financing by large technology companies at a press conference last month and said that competition to secure capital partially explains the rise in long-term government bond yields. This is because big tech companies trying to build astronomical amounts of AI infrastructure are rushing to issue massive amounts of corporate bonds, turning it into a black hole in the bond market.

Of course, there are many factors involved in the recent surge in government bond yields, including concerns about inflation due to high oil prices and the United States' massive fiscal deficit. All of these phenomena cannot be explained simply by expanding AI investment.

Nevertheless, the fact that AI is acting as a powerful driving force for the stock market and a factor in the pressure to surge interest rates in the bond market clearly shows how focused the market is on ‘AI-centered growth.’

Concerning indicators are also emerging that this hot AI craze may be creating an optical illusion that obscures vulnerabilities throughout the market.

The Russell 2000 index, which focuses on small and mid-cap U.S. stocks, fell for five consecutive weeks until the 9th, falling 5.7% during this period. It is the longest decline since May 2022. Small and medium-sized businesses with a relatively high dependence on external borrowing are struggling with rising interest rates.

Ordinary households are also feeling the burden of interest from their bills more than the rosy future promised by AI.

The interest rate on 30-year fixed mortgage loans in the United States rose for 7 consecutive weeks to 7.40% per annum as of the 8th.

Based on the median house price, if 20% of the house price is paid in advance and the remainder is taken out as a loan, the monthly principal and interest repayment is estimated to have increased by about $300 to $400 (about 403,000 to 537,000 won) compared to the beginning of the year.

Rising interest rates are further increasing the threshold for first-time homebuyers and the middle class, who are highly dependent on loans, to own a home.

It is difficult to predict how far the rise in government bond interest rates will continue and how long expectations for AI will be able to overwhelm the burden.

As it is unknown what outcome the unusual trend of the stock and bond markets simultaneously breaking records will lead to, it is still unknown who will pay what costs in the process.

Although the burden is now noticeable on some companies and households, there is no guarantee that it will remain their problem in the future.