US Treasury yields near multi-year highs as fiscal concerns, persistent inflation, geopolitical risks, AI-related corporate borrowing and a more hawkish Fed outlook drive the bond sell-off.
Equity valuations remain under pressure, particularly Technology, growth, REITs and high-dividend stocks, but we view the weakness as a correction rather than the start of a structural bear market.
Malaysia’s fundamentals remain resilient, supported by 6.0% 2Q26 GDP growth and 38.0% July export growth. We expect domestic earnings to remain relatively intact despite global volatility.
Watch key technical supports for stabilisation and buy the dip selectively. We maintain our Barbell Strategy, favouring Technology, Construction, Utilities and selected small caps with strong earnings visibility and structural growth.
Maintain our year-end KLCI target of 1,770.
Quick Take
US Treasury yields have risen sharply, with the 10-year yield climbing to around 4.8% and the 30-year yield approaching its highest level in nearly two decades. The sell-off has been driven by persistent inflation concerns, elevated US fiscal deficits and Treasury issuance, renewed geopolitical tensions and higher oil prices, as well as growing corporate borrowing to fund AI and data-centre investments.
Market expectations for US monetary policy have also shifted following Fed Chairman Kevin Warsh’s Jackson Hole speech, which was viewed as more hawkish and resulted in higher expectations for a September rate hike. Meanwhile, stronger-than-expected economic activity and still-elevated inflation have added to upward pressure on Treasury yields.
The rise in Treasury yields has weighed on global equities, particularly technology and growth stocks, while higher oil prices have added to inflation concerns. In Malaysia, the FBM KLCI fell 25.34 points, or 1.47%, to 1,700.54 on 1 September amid broad-based selling. As highlighted on Page 4 of our previous Market Outlook, we had anticipated a potential near-term weakness in the local market, with the subsequent pullback broadly unfolding as expected.
Our View
The recent rise in Treasury yields is a genuine concern, but we believe the market is becoming overly focused on the possibility of a US bond crisis.
Several forces are driving the sell-off. The first is a shift in expectations for Fed policy. Chairman Kevin Warsh has adopted a less predictable communication style and recently delivered a more hawkish message on inflation, prompting markets to reassess the path of US interest rates. The second is growing concern over US fiscal sustainability as persistent deficits require substantial Treasury issuance. The third is the AI investment boom, which is driving substantial corporate debt issuance to finance data centres and related infrastructure, creating additional competition for investor capital. Finally, geopolitical tensions and higher oil prices are increasing concerns over inflation. Together, these factors are pushing up the term premium and long-term Treasury yields.
However, we believe investors should distinguish between higher yields and a breakdown in the Treasury market. The US authorities still have significant room to respond. The Treasury can adjust the maturity and composition of its debt issuance and conduct buybacks to manage the longer-end yields. The US Treasury has already announced that the maximum size of selected long-end liquidity-support buybacks will increase from US$2bn to at least US$4bn per operation effective 9 September. Meanwhile, the Federal Reserve can adjust interest rates and, in an extreme scenario, resume Treasury purchases through QE.
We therefore believe the probability of a temporary bond-driven correction is materially higher than that of a systemic Treasury crisis.
Market Implications
Higher Treasury yields raise the risk-free rate used to value equities, resulting in downward pressure on valuation multiples. The impact is greatest on companies whose valuations depend heavily on earnings further into the future.
This makes Technology and growth stocks particularly vulnerable. REITs and high-dividend stocks also face pressure as higher Treasury yields reduce the relative attractiveness of equity income.
However, valuation is only one transmission mechanism. Higher Treasury yields also raise corporate borrowing costs, particularly for highly leveraged companies and businesses undertaking large capital expenditure programmes. At the same time, stronger US yields can support the US dollar, tighten global liquidity and weigh on emerging-market fund flows.
We therefore expect the market to increasingly differentiate between companies with strong earnings & balance sheets and those whose valuations depend primarily on multiple expansion.
Malaysia – Fundamentals Remain Intact
We believe Malaysia is relatively well positioned to absorb the current global bond-market volatility. The domestic economy expanded by +6.0% YoY in 2Q26, while July exports surged +38.0%, highlighting continued strength in domestic activity, particularly the E&E sector and AI-related investment. Furthermore, benign inflation at a projected +2.0% in 2026 and a broadly stable OPR outlook should provide an important cushion against global volatility.
Resilient economic fundamentals should continue to provide support for company earnings. If Malaysian equities weaken because of higher US yields, the initial impact should primarily be through valuation and foreign flows rather than a deterioration in domestic earnings.
This creates an opportunity. We would use broad-based market weakness to accumulate fundamentally sound companies where the earnings outlook remains intact.
Technical Analysis - Watch for Stabilisation, Then Buy the Dip
For the FBM KLCI, the recent sell-off has brought the index back towards the 1,700 psychological level after breaking below the previous 1,720 support. We view 1,700 as the immediate key support, with a sustained break below this level likely to open the way towards the next support zone (1,685). On the upside, the 1,720–1,730 zone has now become the first resistance, followed by the 1,750–1,760 resistance zone. Given the sharp decline in recent sessions, we would watch price action closely for signs of stabilisation before increasing exposure.
Strategy
The recent decline in Malaysian equities demonstrates how quickly global bond-market weakness can spill over into domestic markets. The FBM KLCI fell 1.47% to 1,700.54 on 1 September, bringing the index back towards the key support level.
We believe investors should resist the temptation to reduce equity exposure indiscriminately. We maintain our Barbell Strategy, combining defensive, cash-generative companies with selected structural-growth and alpha opportunities, and advocate using market weakness to accumulate fundamentally strong names at more attractive valuations.
The key is to distinguish between valuation risk and fundamental risk. A company whose share price falls because its valuation multiple contracts can become more attractive if earnings remain intact. Conversely, companies with weak cash flow, high leverage or limited earnings visibility may remain unattractive despite a correction.
Therefore, we advocate buying the right dip, rather than simply buying every dip.
Sector Strategy
We remain constructive on Technology, despite its sensitivity to higher bond yields. The structural AI and semiconductor investment cycle remains intact, and we view valuation-driven weakness as an opportunity to accumulate companies with strong earnings growth and structural exposure. Our Tech Top Picks are VITROX (BUY, TP: RM11.12), QES (BUY, TP: RM0.75), EG (BUY, TP: RM2.93) and FRONTKN (BUY, TP: RM5.86).
We remain positive on Construction, underpinned by Malaysia’s ongoing infrastructure, data-centre and power investment cycle. We favour companies with strong order books and good earnings visibility. Our Construction Top Picks are ISF (BUY, TP: RM0.92) and HSS (BUY, TP: RM0.70).
Utilities offer a combination of defensive characteristics and structural growth, particularly from rising electricity demand driven by data centres. However, we remain selective given the sector’s sensitivity to higher bond yields. Our preferred pick is TENAGA (BUY, TP: RM16.37).
We view Banks as a core portfolio exposure, supported by resilient domestic growth and stable credit conditions. However, we expect some downside risk in local banks as fund managers begin to reposition ahead of the FBM KLCI 50 transition, which will structurally dilute the weighting of financial stocks. Against this backdrop, we see greater alpha potential in selected Technology, Construction and small-cap names, where earnings growth and structural themes remain more compelling.
Conclusion
We expect US Treasury yields to remain elevated in the near term as markets digest fiscal concerns, inflation risks, geopolitical developments, AI-related borrowing and the Fed's policy direction. This will keep global equity markets volatile, particularly in September as investors await the Fed's policy decision.
However, we do not believe the current environment represents the beginning of a structural equity bear market. Malaysia's strong domestic fundamentals provide a cushion, while the US authorities retain significant tools to prevent Treasury-market stress from becoming systemic. Our year-end FBM KLCI target remains at 1,770.
We therefore maintain our Barbell strategy and advocate buying the dip strategy, with preference for technology, construction, utilities and selected small caps where structural growth and earnings visibility can offset higher discount rates.
Disclaimer
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.029059 | 4.061288 |
| EUR | 4.678261 | 4.683031 |
| CNY | 0.601267 | 0.601882 |
| HKD | 0.513945 | 0.517555 |
| SGD | 3.163772 | 3.186125 |