The persistent rise in US long-term interest rates is a trend that deserves more attention than the debate over whether global central banks will cut or raise rates by 25 basis points, according to David Chao, Invesco's Global Market Strategist for Asia Pacific (excluding Japan). He points out that global bond markets are sending a powerful signal that the cost of capital has been structurally pushed significantly higher.

From an investment perspective, Chao notes that higher yields will undoubtedly put pressure on the valuations of large-cap technology stocks, as these companies are more sensitive to changes in discount rates, and it also undermines the justification for their extremely high valuation multiples. However, he believes the rise in bond yields is rooted in the resilience of US economic growth, suggesting that robust earnings from the tech sector could help offset some of the valuation pressure.

He adds that the same logic applies to emerging markets and Asian equities. Rising US Treasury yields are a headwind, particularly for companies that rely on external financing. In contrast, North Asian stock markets are relatively more resilient, given their trade surpluses and solid domestic balance sheets. With US Treasury yields climbing above 5%, he believes bonds are becoming increasingly attractive.

His base case scenario is that rising long-end yields have already reduced the necessity for the Federal Reserve to implement further rate hikes. As overall borrowing costs in the US have broadly increased and financial conditions have tightened, the bond market is effectively doing the Fed's tightening work for it.