On August 19th, the U.S. Treasury Department unexpectedly decided to at least double its long-term bond repurchase program, directly pushing global yields lower. While many assumed tech stocks would lead the charge, the real frontrunner turned out to be innovative drugs. On Thursday, August 20th, the market was flooded with rising pharmaceutical stocks, a sight that felt like a trip back to the beautiful summer of 2020.
Treasury Secretary Bessent once again intervened in the bond market on Wednesday night. This is a tactic the Treasury has mastered, having used buybacks to offset the effects of monetary tightening when Powell was raising rates during Yellen's tenure. Since Trump took office, Bessent has expanded and accelerated the pace of Treasury buybacks. Now, it's almost assumed that the U.S. has activated YCC (Yield Curve Control). In essence, this means yields on certain maturities cannot exceed a set target. If anyone sells, the government prints unlimited money to buy, pinning the price down. Why worry about the U.S.? The Treasury's frequent market interventions, particularly with long-end rates, make one thing clear: the U.S. government will not allow tightening financial conditions to end the current boom. The YCC card is always ready to be played.
Typically, rising long-term bond yields are bearish for gold, but a strange thing happened on Thursday: gold rallied strongly, with COMEX gold surging on Wednesday night. As mentioned yesterday, long-term Treasury yields approximate the sum of real rates, expected inflation, and term premium. The current rise in rates isn't driven by inflation fears but mainly by term premium. If Treasury intervention means this is actually monetary easing rather than tightening, it's bullish for gold.
Beyond gold, the performance of innovative drugs has been truly impressive. The Hong Kong Stock Connect innovative drug sector attacked fiercely, with names like Yunying Xinyao at one point surging over 70% and Kangmoumou Bio up more than 51%. The sector also lifted related ETFs, including the Hong Kong Stock Connect Innovative Drug ETF I've been tracking and writing about repeatedly, which has continued to strengthen recently. It's enough to make one's heart ache.
On Wednesday night, U.S. drug stocks also led gains, with Moderna surging over 177%. The main catalyst was that its mRNA tumor vaccine reached dual primary endpoints in a Phase III trial—in simple terms, its melanoma cancer vaccine trial succeeded. Analysts note that while melanoma accounts for only about 1% of skin cancers, it's the leading cause of skin cancer deaths, with recurrence peaking 2-3 years post-surgery. The vaccine combined with Keytruda in over 1,100 high-risk melanoma patients who had complete surgical resection, achieving key endpoints for recurrence-free survival and reduced risk of distant metastasis. This result further confirms the positive efficacy seen in the IIb phase's five-year follow-up.
Moderna was already a star company in 2021, primarily known for its COVID vaccine, with shares skyrocketing during the pandemic before giving back most gains afterward. Will history repeat itself? There's a significant difference this time: this is about conquering cancer, which is a completely different league from vaccines. Successfully treating various cancers has always been a shared human aspiration, and with this major breakthrough, the market is naturally willing to assign a higher valuation. This also represents a massive new narrative for innovative drugs as a whole.
The innovative drug sector has been repeatedly active this year, and I've written about it often. Just yesterday, I was discussing how to invest in innovative drugs with peers in the pharmaceutical space. Some of their views are that beyond avoiding troubled companies in research, the sector has many underwater issues, and one must also consider industry prosperity. So, many pharmaceutical investors focus most on overall industry valuation levels and individual stock prices; they don't care much about short-term event disruptions, preferring to look at a 3-5 year medium-to-long-term horizon. In other words, it's about buying on dips and selling when a big rally accelerates.
Back to innovative drugs. Although the Hong Kong Stock Connect innovative drug index pulled back after spiking, it has effectively broken out. While writing the Q2 reports, I also noted that many balanced fund managers have added some pharma exposure this year, mostly leaning toward innovative drugs. The holdings of active pharma-themed funds are mainly concentrated in three areas: innovative drugs, traditional pharma, and CDMO. With some tech capital flowing out, I suspect that with progress on the commercialization and BD fronts, the industry will see broad earnings beats this year. Combined with potential BD deals in Q3 and Q4, plus AI-related collaborations, there might be further opportunities in innovative drugs going forward.
As someone who has been hurt by innovative drugs before, I'm now tempted to take another shot (this is not investment advice—just thinking out loud!). However, I must emphasize a few points. First, volatility in innovative drugs is extremely high! Getting a good entry price is likely crucial. Second, avoid picking individual stocks. Hengrui Pharmaceuticals missed earnings, and critically, its innovative drug segment underperformed expectations in H1. Choosing the right sector but the wrong stock can be absolutely painful. Third, I still prefer the T+0 Hong Kong Stock Connect Innovative Drug ETF I've been following. It excludes CXO, is 100% focused on innovative drug R&D companies, with about 70% allocated to innovative drug R&D leaders. The underlying is relatively pure, and T+0 trading provides ample flexibility.
Having written about innovative drugs for over two months, seeing this explosion on Thursday was bittersweet. I hope that if tech shifts gears in H2, innovative drugs can take over the baton.