Column · 2026-09-11
[Kwangsoo's Take] Three Channels Through Which Rising Treasury Yields Pull Down Stock Prices
Lee Kwangsoo distinguished between market interest rates and the policy rate, likening market rates to a thermometer measuring real-time temperature and the policy rate to a thermostat trying to regulate it. Left to the market, rates tend to move greedily, which is why central banks intervene to set the policy rate. He also noted that the U.S. Federal Reserve is not a government agency but an organization closer to a private consortium formed by member banks, explaining that even though President Trump appoints the chair, the banks that make up the board's shareholders mean monetary policy may not move entirely according to the government's wishes.
He identified the first channel through which rising Treasury yields pull down stock prices as competition for asset allocation: as Treasury yields rise, the appeal of a guaranteed return increases, reducing investors' incentive to buy risk assets like stocks. The second is the expansion of the discount rate: since a stock price is the present value of a company's future earnings, higher rates lower the present value of future cash flows, which in theory should push stock prices down. He illustrated this with the question of whether one would rather have 1 million won a year from now or 1 million won today.
The third channel is the rising cost of capital for AI investment-heavy companies. For companies that are not yet profitable and are funding data center investments with debt, higher rates raise interest costs, adding to concerns about a pullback in investment. He summarized that the combination of these three factors explains why the market has become particularly sensitive to Treasury yields recently.
[Kwangsoo's Take] The Structure of the U.S. Fiscal Deficit Vicious Cycle and Rising Treasury Yields
Lee Kwangsoo began with the principle that bond prices and bond yields move inversely. A bond's coupon rate is fixed, but its price in the secondary market fluctuates with supply and demand, so when supply exceeds demand and prices fall, the effective yield rises. He diagnosed that U.S. Treasuries are currently in this state.
He identified the U.S. government's widening fiscal deficit as the root cause of rising supply. Mandatory spending items such as Social Security and Medicare are difficult to cut given an aging population, and defense spending is also hard to reduce, while he stressed that the item that has grown fastest recently is interest payments on Treasury debt. As the fiscal deficit widens, Treasury issuance increases; as increased Treasury supply pushes yields higher, interest costs rise further; and to cover those interest costs, more Treasuries are issued — a repeating vicious cycle.
On the demand side, he noted that inflation is eroding the appeal of Treasuries. Even if a 10-year bond pays 5% annual interest, if prices are rising 6% a year over that period, holding real assets instead of bonds becomes the better calculation — meaning that inflation concerns stemming from the escalating conflict are themselves undermining demand for Treasuries.
He argued that breaking this vicious cycle ultimately requires lowering rates, which in turn requires ending the war that is fueling inflation. Since the U.S. stands to gain relatively little from this conflict while its losses continue to mount, he expects pressure toward ending the war to grow over time. He also pointed out that tariff revenue appears to have been used to offset the tax revenue lost to corporate tax cuts, with the two amounts coincidentally similar in scale. He added that this raises the possibility of a corporate tax increase under a future change in administration, and that U.S. equities could see a shakeout around that time.
[Kwangsoo's Take] A Long-Term Investment Thesis Seen Through a 100-Year Price Chart
Lee Kwangsoo presented a chart showing that the U.S. policy rate has trended lower since the 1980s alongside rising national debt, arguing that once debt levels are already high, rates cannot be raised on a sustained trend and can only be lifted temporarily to address inflation. His long-term view is that this structural constraint will ultimately lead back to the end of the war and a return to a low-rate regime.
He then presented a chart of price changes by product category over the past 100 years, noting that the common belief that all prices rise equally is not true. Over the same period, refrigerator and telephone prices actually fell, while New York hotel room rates and movie ticket prices rose. He explained that technological innovation has lowered prices faster than wages have risen, which is what has allowed the capitalist system to persist, and characterized AI as an extension of this same cost-lowering technological innovation.
He named two reliable approaches to long-term forecasting — forecasting the very distant future, and forecasting outcomes that are essentially inevitable — saying that a forecast that the KOSPI will be higher in five years than it is now is the kind of prediction likely to prove correct. He closed the lecture by advising that surviving as an investor until that point requires avoiding large losses, and that maximizing returns requires adjusting one's response as market conditions change rather than simply holding on for the long term.