In the wake of surging long-dated Treasury yields fueled by recent oil price spikes and the Federal Reserve's first rate hike since 2023, the asset management arm of Wall Street banking giant JPMorgan has pivoted back toward long-duration government bonds in the US, Japan, and Australia.

The renewed tightening of monetary policy by major central banks, including the Fed, combined with persistently rising fiscal deficits, is lifting the term premium demanded by investors for holding long-term debt. This dynamic is putting the 10-year Treasury yield—widely dubbed the "anchor for global asset pricing"—to the test. It has also attracted contrarian capital from Wall Street, potentially cooling the panic surrounding long-duration bond selloffs and yield surges.

Should long-term Treasury yields above 10 years follow a "2023-style" path of peaking and then steadily retreating, it could indirectly propel global equities further along their bull-market trajectory, driven by robust earnings growth tied to the AI compute theme. For the global bull market centered on AI compute and applications, a 10-year Treasury yield breaking above the 5% threshold represents a significant headwind for valuations and investor sentiment. However, if contrarian buying led by JPMorgan re-enters the Treasury market at the "most painful moment" and pulls the yield curve lower, it would substantially weaken this headwind for the AI bull run.

In other words, if contrarian inflows from major Wall Street institutions like JPMorgan Asset Management push long-end Treasury yields down, while AI-related earnings expectations maintain strong growth and equity risk premiums do not rise significantly, the interest-rate headwind on valuations and sentiment would ease, providing support for the AI bull market to persist. This does not, however, mean the headwind has fully dissipated or that equities will necessarily surge.

Bob Michele, Chief Investment Officer and head of global fixed income at the asset management division, stated that his core assumption is not that central banks are about to pivot dovish. Instead, he believes the tightening actions from the European Central Bank, the Fed, and subsequently the Bank of Japan will help rebuild anti-inflation credibility, thereby anchoring long-term inflation expectations lower and stabilizing long-duration yields. If combined with a stabilization in Middle East tensions, long-end yields could peak and then decline.

JPMorgan Steps In at the "Most Painful Moment" for Bonds

Bob Michele of JPMorgan Asset Management said his team has begun buying long-duration government bonds in the US, Japan, and Australia, calling current prices "simply too cheap" and declaring that the bond market has reached its "most painful moment."

"The dominos are starting to fall," Michele said in an interview on Wednesday. He pointed to a sequence of central bank actions—starting with the ECB's rate hike last week, followed by the Fed, and potentially the Bank of Japan on Friday—as key drivers. The completion of these rate hike cycles and the restoration of anti-inflation credibility are crucial supports for the bond market.

Another key factor, he noted, is the potential stabilization of the Middle East situation as midterm elections approach. Michele, who also serves as Chief Investment Officer for the fixed income business, said that a combination of tighter monetary policy and a calmer geopolitical landscape in the Middle East would signal that yields have peaked.

Recent weeks have seen a violent selloff in US Treasuries, pushing 10-year and 30-year yields to multi-year highs ahead of the Fed's first rate hike since 2023 on Wednesday. Michele stated after the Fed's announcement that the selloff at the long end of the yield curve had been overdone.

He also highlighted the longer-dated Treasury buyback program initiated by US Treasury Secretary Scott Bessent last month as an important stabilizing force, adding that Bessent "has enough ammunition to do more if he wants." Michele warned that the rapid rise in long-end yields (10 years and beyond) "underscores the sense that the market thinks the Fed has lost control," and said the renewed rate hike should help Fed policymakers "reassert that they are still in charge."

Oil Price Storm Drives Yields Higher; Contrarian Buying Emerges at 5% Levels, Setting Stage for AI Bull Resurgence?

Disruptions to Middle East energy transportation and increasingly severe threats to energy exports have been significant drivers of the global repricing of long-duration debt. Houthi forces, after seizing the port of Mocha and Perim Island, have expanded their control over the Greater and Lesser Hanish Islands, increasing threats to shipping in the Bab el-Mandeb Strait and the Red Sea. Saudi Arabia continues to conduct airstrikes on Yemen, and the East-West oil pipeline, which serves as an alternative route bypassing the Strait of Hormuz, was attacked and halted.

Observable vessel transits through the Strait of Hormuz on September 15 were only four ships, and the suspension of crude loading at Yanbu port has further squeezed Saudi export channels. However, news of increased Saudi supply via Oman has partially alleviated supply concerns: on September 16, Brent and WTI crude futures fell 2.7% and 3.2%, respectively, settling at $105.83 and $102.43 per barrel.

The energy shock persists, but whether inflation trades can cool depends on actual transportation and supply recovery, not just the intensity of conflict headlines. On September 16, the Fed raised its federal funds rate target range by 25 basis points to 3.75%-4.00%, its first hike since 2023. The previous day, the 10-year Treasury yield briefly touched 5.041%, a high not seen since 2007. Japan's 10-year government bond yield also reached around 3.04%, a 30-year high, while the 30-year JGB had already approached record closing levels near 4.18% on September 1.

Renewed central bank tightening and rising term premiums for holding long-term debt are jointly testing the "anchor for global asset pricing," while also attracting contrarian allocation. In this context, Bob Michele of JPMorgan Asset Management has begun buying long-duration bonds in the US, Japan, and Australia.

From the perspective of nominal yield entry points, the allure of US Treasuries with maturities of 10 years or more near the 5% level has indeed strengthened, but "locking in cash flows" and "trading for yield declines" are two distinct logics. For investors holding a standard fixed-rate government bond to maturity, the contractual coupon and principal repayment are certain, assuming timely payment. For example, buying a bond with a 5% coupon at par guarantees an annual interest payment of 5% of the initial principal, and intermediate market yield rises do not reduce that coupon. However, a market-reported 5% yield to maturity does not mean all available bonds carry a 5% coupon.

For active managers, the appeal also includes potential capital gains from falling yields. Using a first-order approximation of modified duration, assuming a portfolio duration of 8 years, a 50 basis point decline in yields would lead to an approximate 4% price increase; conversely, a 50 basis point rise would cause a roughly 4% price decline, excluding coupon, convexity, and other effects. A higher yield entry point offers better income conditions but does not eliminate risks such as mark-to-market volatility or inflation eroding purchasing power. Therefore, some strategists argue that while acknowledging the value in long-duration bonds, it is premature to declare that yields on maturities of 10 years or more have definitively peaked.

Long-term nominal yields can be approximated as the average of expected future short-term nominal rates plus a term premium. When central bank tightening enhances the credibility that inflation will be controlled, even if short-end rates rise in the near term, market demands for longer-dated rates and term premium may still decline. This is the mechanism underpinning Michele's contrarian trade.

The underlying mechanism behind "rate hikes potentially being positive for long bonds" is the repricing of the future rate path and term premium, not that hikes automatically lower long-term yields. Bessent's buyback program can provide support by improving liquidity in older issues, but Treasury buybacks are not equivalent to central bank quantitative easing and cannot alone eliminate fiscal financing pressures. The impact on net duration supply in the market also depends on accompanying new issuance arrangements.

For the global equity bull market since 2023 driven by the AI investment wave, the classic "AI bull market continuation chain"—where long-duration bond value emerges, easing yield pressures, and AI compute themes drive broad benchmark index earnings expansion, thus opening wider valuation space—is a conditionally valid transmission path. From a pricing mechanism standpoint, if long-term yields decline primarily due to energy supply recovery, eased inflation risks, and term premium moderation, while credit spreads remain stable and earnings expectations do not deteriorate, this would help alleviate pressure on equity discount rates and corporate financing costs. Conversely, if long-duration bond gains primarily reflect recession expectations, equities may simultaneously face downward earnings revisions and rising risk premiums, and may not necessarily follow suit.

High yields are attracting contrarian long-duration bond buying. If these inflows reinforce with cooling inflation risks, they could create conditions for the AI-earnings-driven super bull market to continue. While long-duration bond stabilization is a potential catalyst, earnings delivery and valuation discipline will ultimately determine how far the bull market can run.

A Goldman Sachs research report released over the weekend laid out the "earnings trump everything" bullish thesis for the US stock market's long-term uptrend since ChatGPT swept the globe in 2022. The report forecasts S&P 500 earnings per share (EPS) to reach $340 in 2026, implying a substantial year-on-year increase of 24% from an already high base, and further to $385 in 2027, up 13%. Meanwhile, the forward price-to-earnings ratio has contracted from 22 times at the start of the year to 19 times, indicating that the interest-rate headwind has been reflected through valuation compression.

Historical data cited in the report shows that following the start of seven rate hike cycles, the S&P 500 averaged a 2% decline over three months, but averaged a 9% gain over twelve months. While these figures do not support the notion that rate hikes inevitably terminate bull market trends, they also cannot fully guarantee future returns will replicate history. Goldman Sachs emphasized that the critical factor is whether earnings delivery trends can offset further valuation declines.

Within the AI data center compute infrastructure chain, strong demand for compute resources driven by AI agents may accelerate across multiple segments, including GPUs/ASICs, HBM, server DRAM, enterprise SSDs, high-speed optical interconnect devices within data centers, data center CPUs, and data center power chains. Meanwhile, the AI compute industry chain already has verifiable earnings support: Nvidia's data center revenue for the second quarter of fiscal 2027 reached $89 billion, up 117% year-over-year, with adjusted diluted EPS of $2.22, up 120%, demonstrating that growth is not merely a capital expenditure narrative but is also reflected in actual earnings.

Beyond the strong performance of industry leaders, robust AI compute demand linked to the supply chain is also evident in South Korea's record-breaking semiconductor exports and long-term capacity agreements. Korean customs data shows that semiconductor exports from September 1-10 reached $16.5 billion, up 270% year-over-year, following August exports of $46.65 billion, up 209%.

Another Wall Street major, Jefferies, recently stated that driven by the dual engines of the AI investment frenzy and AI-related corporate earnings beating expectations, the S&P 500 is projected to surge to 8,000 points by the end of 2026 and further touch 9,000 points in 2027. Jefferies' core logic is clear and forceful: in a cycle where AI-driven earnings growth exceeds historical averages by more than two-fold, fighting the earnings trend is dangerous. Jefferies' base case for the S&P 500 at 8,000 points by 2026 is based on EPS of $373 (up 35% year-over-year, well above the consensus of 29%) and a 21.5 times price-to-earnings multiple.