Bonds or equities? Pictet says 5% US 10-year Treasury yield could tip the scales

Swiss private bank Pictet Wealth Management predicts inflation will settle at around 3% instead of the 2% target set by central banks, leading to higher long-term bond yields. This shift has prompted investors to consider whether bonds or equities are cheaper, with 5% being the key level for the 10-year US Treasury yield that could tip the scales.

Pictet's chief investment officer Kelvin Tay anticipates annualized US dollar returns of 5% for US government bonds over the next decade, up from 0.9% in the past decade. For equities, Asia ex-Japan is expected to yield 8.3% annually, Europe 7.9%, Japan 7.8%, and the US 6.9% over the same period. The term premium and inflation are being driven by aging populations, resource competition, and geopolitical risk, with US labor participation at a 50-year low due to visa issues.

Competition for resources such as DRAM chips and geopolitical unrest in the Middle East contribute to higher resource prices. AI adoption is set to benefit services economies like the US and the UK, as well as healthcare and defense sectors. Emerging markets, including South Korea, Taiwan, China, Malaysia, Thailand, and Singapore, will play a crucial role in AI and technology development, with local currency bond markets providing stable funding and reducing foreign exchange exposure.

Singapore is expected to achieve stable growth, benefiting from measures to boost the stock exchange and strong exports driven by AI-related demand.