[Autumn 2026: Thorough Inference] Unraveling the Contradiction of US Treasury Yields Over 5% vs. Record-High Stock Prices. Future Interest Rate and Stock Price Time-Series …

Introduction: The True Nature of the ‘Strong Sense of Incongruity’ Emitted by Today’s Market
If you open a finance textbook, it states that ‘high interest rates are a headwind for stocks.’ With US Treasuries offering a risk-free yield of over 5%, funds should naturally flow into bonds, and money should be withdrawn from the overvalued stock market.
However, what about the actual market? While the US 10-year Treasury yield remains stuck at a high level above 5%, major stock indices are showing strength by hitting record highs.
‘Why aren’t stock prices falling when interest rates are this high?’
‘When and how will this distortion be resolved?’
In this article, we will break down the current macroeconomic structure and thoroughly infer the future path of interest rates and stock prices in ‘short-term, medium-term, and long-term’ time series. Furthermore, we will unravel practical strategies for how individual investors should manage their asset allocation and stock selection in this market environment.

Chapter 1: Why are ‘High Interest Rates and High Stock Prices’ Happening Simultaneously?

Behind this seemingly contradictory phenomenon lies a ‘change’ in the economic structure of recent years. The main factors can be summarized in the following three points.
1. Strength of Nominal Economic Growth (Inflation + Real Growth)
While inflation has not completely subsided, corporate revenue (on a nominal basis) is being maintained and expanded by passing inflation on to prices. The existence of companies that can generate profit growth exceeding even a 5% interest rate is providing a floor for stock prices.
2. AI and Technology-Driven ‘Winners’ Monopolizing Profits
Mega-tech and AI-related companies, which generate overwhelming free cash flow sufficient to repel the pressure of rising market-wide interest rates, are driving the entire index. This is what is known as a ‘polarized market’.
3. Fiscal Expansion and Structural Inflationary Pressure
The deterioration of supply and demand due to increased issuance of government bonds, as well as inflation concerns stemming from energy prices and geopolitical risks, are pushing long-term interest rates (10-year and 30-year bonds) upward. The market is pricing in ‘Higher for Longer’ interest rates while betting on the adaptability of companies.

Chapter 2: The Future Path of Interest Rates and Stock Prices — Time-Series Scenario Inference

How will this magma of ‘high interest rates and high stock prices’ unfold over time? We will infer this by dividing it into three phases.

1. [Short-term (Recent to several months): Persistence of momentum and vigilance against ‘interest rate shocks’]
Interest rate trends: Fluctuating at a high level around 5% to 5.3%. Repeated ups and downs due to fluctuations in inflation indicators and employment statistics.
Stock price trends: While maintaining high levels against the backdrop of strong corporate earnings, rapid adjustments (profit-taking) are likely to occur, centered on overvalued high-tech stocks, in phases where interest rates jump further (e.g., a sharp rise to over 5.4%).
Inference: For the time being in the short term, the ‘tug-of-war between high stock prices and high interest rates’ will continue. However, because the high level of interest rates will gradually begin to squeeze corporate refinancing costs, the weeding out of stocks based on the ‘quality’ of earnings will become intense.
2. [Medium-term (6 months to 1 year later): Cumulative burden of high interest rates and the ‘true test’ of the economy]
Interest rate trends: While policy rates remain on hold or see only minor adjustments, long-term interest rates will begin to shift toward a gradual downward trend (interest rate peak-out) as economic slowdown signals begin to light up.
Stock price trends: Due to the cumulative effect of high interest rates, earnings deterioration will surface in interest-sensitive sectors such as small and medium-sized enterprises, durable goods consumption, and commercial real estate. On an index basis, it is highly likely to experience a temporary adjustment (loss of momentum).
Inference: The brink of whether a ‘soft landing’ is possible. If corporate earnings can prove their resilience here, stock prices will gain the energy to aim for record highs again, but if the economic slowdown is too strong, stock prices will be forced to adjust.
3. [Long-term (1 to 3 years later): Full-scale interest rate cut phase and the reversal of the ‘appeal of asset allocation’]
Interest rate trends: Confirming that inflation has completely settled, the central bank will enter a full-scale interest rate cut cycle. The 10-year Treasury yield will head toward the low 4% range or lower.
Stock price trends: With the decline in interest rates, funds will circulate into defensive stocks, small and mid-cap stocks, and the real estate sector, which were previously considered overvalued, broadening the base of the market.
Inference: In this phase where interest rate declines are recognized, it will be a golden era where it is possible to capture both the ‘capital gains (price appreciation) of bonds’ and the ‘full-scale recovery of stock prices’ that were positioned during the high-interest-rate period.

Chapter 3: How Should Individual Investors Navigate This? Concrete Practical Strategies

From here on, I will explain in detail the specific asset allocation and individual stock/bond selection strategies for individual investors to survive and maximize returns during this transformative period of “high interest rates (US Treasury yields over 5%) x high stock prices (major indices near record highs).”
1. Concrete Tactics for Bond Portfolios: How to “Lock In” Yields in the 5% Range?
With 10-year and 30-year US Treasury yields exceeding 5%, we are currently in a “yield lock-in” opportunity that occurs once every few decades from a historical perspective.
① Utilizing Ultra-Long-Term Government Bonds (20-30 Year Bonds) and STRIPS
Simply rolling over short-term bonds (like T-Bills) exposes you to reinvestment risk during future interest rate cut cycles.
Strategy: Allocate approximately 20-30% of your portfolio to ultra-long-term US Treasury bonds (or US Treasury ETFs such as TLT or EDV) with maturities of 20 years or more.
Goal: Secure high income gains of around 5% over the long term, while aiming for significant capital gains (rise in bond prices) by leveraging the long duration (high interest rate sensitivity) during future interest rate cut cycles (the long-term scenario in Chapter 2).
② Beware of Credit Spread Compression
Currently, spreads (yield differences from government bonds) for investment-grade corporate bonds and high-yield bonds are at historically narrow levels. To prepare for rising default risks during an economic slowdown (the medium-term scenario), the ironclad rule is to build your portfolio centered on “zero-credit-risk US Treasuries” rather than corporate bonds.
2. Stock Selection: “GARP Strategy” and “Cash Flow Focus” to Withstand High Interest Rates
When investing new capital while stock prices are at record highs, you must rigorously determine whether a company has the “earning power to bounce back from high interest burdens,” rather than relying on superficial low P/E ratios (value traps).
① Thorough Implementation of the GARP (Growth at a Reasonable Price) Strategy
Buying large-cap tech stocks that have surged in price all at once carries the risk of buying at the top. Therefore, we prioritize GARP metrics that balance growth and valuation.
PEG Ratio (1.2 to 1.5 or less): An indicator calculated by dividing the forward P/E ratio by the expected EPS growth rate. It identifies companies whose stock prices are not overbought relative to their growth potential.
ROIC (Return on Invested Capital) > WACC (Weighted Average Cost of Capital): Confirm whether the company can maintain capital efficiency that significantly exceeds its cost of capital, even in a high-interest-rate environment.
② Three “Financial Signals” to Watch
1. Abundant Free Cash Flow (FCF) and high FCF margin (15% or higher): Companies that can fund their own growth and shareholder returns without relying on external financing (borrowing or capital increases).
2. Debt Structure Centered on Fixed-Rate, Long-Term Bonds: Companies that do not face a massive “refinancing at high interest rates” within the next few years.
3. Strong Pricing Power (Pricing Power): Market-leading companies that can maintain or expand their gross margins even under inflation.
3. Cash Ratio and Allocation (Model Portfolio Ratios and Composition)
The composition and roles of the recommended allocation example (for standard risk tolerance) in the current market environment are as follows.
US Stocks (Large-cap Growth, GARP Stocks): 40%
Role and Goal: The main engine to capture structural growth such as AI and DX. Thorough individual selection (focusing on FCF) is essential.
US Treasuries (Medium to Ultra-Long-Term Bonds): 35%
Role and Goal: In addition to locking in yields over 5%, we aim for capital gains during future interest rate cuts (acting as a buffer against stock price declines).
Alternatives / Gold (Gold) : 10%
Role and Goal: Serves as a hedge against expanding fiscal deficits, geopolitical risks, and a resurgence of inflation.
Cash and Deposits (Cash / Short-term MMF) : 15%
Role and Goal: Ensures agility as “funds for buying the dip” in the event of market crashes, such as interest rate shocks or earnings adjustments.
4. Trade Execution Timeline and “Buy” Signals
1. Phase 1 (Now to Short-Term): Increasing Bond Holdings and Careful Stock Selection
When the 10-year US Treasury yield reaches 5.0-5.3%, we will gradually buy ultra-long-term bonds (or bond ETFs) in installments.
For stocks, avoid buying indices all at once; wait for dips (profit-taking adjustments of about 5-10%) and purchase GARP stocks using dollar-cost averaging.
2. Phase 2 (Medium-Term: Economic Slowdown/Confirming Interest Rate Peak): Reallocation to Stocks
When temporary stock price declines or downward revisions occur during corporate earnings announcements due to the impact of high interest rates, we will deploy the reserved cash (15%) to pick up structurally winning companies.
3. Phase 3 (Long-Term: After Interest Rate Cuts Begin): Harvesting the Portfolio
As bond prices rise (yields fall), we will proceed with profit-taking and rotate profits into small-to-mid-cap stocks or defensive stocks that remain undervalued.

Summary: Distortion is Not a “Risk” but the “Greatest Opportunity”
The coexistence of “US Treasury yields over 5%” and “record-high stock prices” may seem like an eerie market environment at first glance. However, looking back at history, major distortions in financial markets have been the driving force that brings exceptional returns to investors.
Securing historically high yields with bonds
Enjoying the profits of structurally growing companies with stocks
Aiming for capital gains at the moment the tide turns for both (the interest rate cut transition period)
By keeping these three axes in mind and practicing calm asset allocation according to the timeline, you should be able to steadily grow your assets regardless of what market fluctuations may come.