[US Interest Rate Surge] 2, 10, and 30-Year Treasury Yields Exceed COVID-Shock Levels: 3 Strategies for Long-Term Investors Now

As of the end of September, US 2-year, 10-year, and 30-year Treasury yields have seen a rapid rise, with the 10-year yield exceeding 5.2% and the 30-year yield surpassing 5.5%, marking new highs since the COVID-19 pandemic (and even reaching multi-decade highs) while remaining elevated.

With Fed Chair Powell’s ‘inflation control as top priority (hawkish)’ stance and the risk of further rate hikes within the year (priced into the October FOMC) shaking the market, I have organized ‘what actions long-term investors should take right now’.

1. Current Market Environment: What is happening?

The fear from ‘Higher for Longer’ to ‘Higher for Higher’

Since Jackson Hole, the Fed led by Chair Powell has strengthened its hawkish stance, not ruling out additional rate hikes to combat inflation.

Deterioration of government bond supply and demand and the rise in real interest rates

Beyond just inflation concerns, the increase in government bond issuance due to the massive US fiscal deficit is pushing down bond prices (= surging yields), which is also a strong headwind for the stock market (rise in discount rates).

2. Three strategies long-term investors should take now

While it is a tough, volatile market for short-term traders with a mix of panic selling and contrarian buying, for long-term investors looking 5 to 10 years ahead, it is a ‘perfect opportunity to refine your thinking and portfolio’.

① Leverage ‘cash yields’ and buy in installments (dollar-cost averaging) without rushing

Enjoy the benefits of risk-free interest rates

With interest rates near 5%, you can earn a risk-free return of around 5% annually just by keeping cash in MMFs or short-term Treasury bills (T-Bills). There is no need to force all your money into stocks.

Buying should be ‘time-diversified’ rather than ‘lump-sum’

It is impossible to pinpoint the peak of interest rates. Even when aiming for stock market dips, the correct stance is to calmly pick up shares through monthly accumulation settings or installment buying while maintaining a sufficient cash cushion.

② Check the ‘quality’ of companies in your portfolio

Are they stocks that can withstand a high-interest-rate environment?

Companies that cannot survive in a 5% interest rate era are those with ‘high interest-bearing debt and an inability to generate cash on their own’.

Concentration on quality stocks

Strong balance sheet (abundant cash, low debt)

Pricing power (a strong business model that can raise prices even under inflation)

Stable free cash flow

Global major companies (Big Tech and high-equity blue-chip stocks) equipped with the above will make a strong comeback in the medium to long term, even if their stock prices are temporarily suppressed by high interest rates.

3. Incorporate bonds (government bonds) as an ‘income source for your portfolio’

The first ‘real bond yields’ in decades

Unlike the zero-interest-rate era, this is an environment where you can lock in yields of 5% or more per year for a long period simply by buying US Treasuries (10 to 30 years).

Aiming for capital gains when interest rates fall in the future

Even if not immediately, if the US economy slows down in a few years and the Fed eventually pivots to rate cuts, high-yield long-term government bonds will provide significant capital gains. This is an excellent time to diversify from an ‘equities-only’ allocation to an ‘equities + US Treasuries’ allocation.

💡 Summary: The one action you must not take

What long-term investors should avoid most in this phase is ‘panicking over news of surging interest rates and dumping quality growth stocks or index funds at the bottom.’

Wait while earning a yield of around 5% in cash positions (such as MMFs)

Accumulate and purchase quality stocks and broad indices in installments during stock market plunges

Consider allocating to US Treasuries where high yields can be locked in

Do not be swayed by daily interest rate spikes that act as noise; let’s calmly leverage the benefits available precisely because of this high-interest-rate era (high risk-free rates, quality stocks left undervalued).