Mid-year outlook: Investing in a multi-polar world

Amid policy uncertainty, dominance of US assets faces bigger challenge. By Kean Tan

- Kean Tan

May saw the best return for the S&P 500 index since November 2023, which is remarkable given that it coincided with a rise in long-term US Treasury yields. In fact, the yield on both 10and 30-year Treasuries rose by almost 30 basis points in May, ending the month at 4.4% and 4.9%, respectively.

This phenomenon also extended further east, with equities posting positive performance figures in May despite rising bond yields, albeit to a lesser extent relative to their US counterparts.

The US dollar remains the most prominent asset not caught up in the risk-on sentiment. Despite rising US bond yields, the US Dollar Index ended the month slightly in the red, still trading close to the lows posted in mid-April. Fiscal concerns are moving back to the forefront for investors, following the US House of Representatives' approval of President Trump's “big, beautiful bill”.

The proposed extension of tax cuts without matching spending cuts would widen the fiscal deficit, potentially pushing long-term bond yields higher as investors demand more compensation for taking on fiscal risk.

While equity markets can typically accommodate gradually rising yields when supported by improving growth prospects, history suggests a turning point near the 5.0% mark for 10-year yields. Beyond that level, the positive correlation between equity and bond prices tends to reverse, as higher borrowing costs weigh on valuations and corporate profitability.