Yields on 10-year Treasuries have risen rapidly since March, from 1.72 per cent in early March to 2.48 per cent on March 25.

So far, it has exceeded 2.8% and remained at the level of 2.828%. The last time such a high level was at the end of 2018.

Yields on three-year, five-year, seven-year and 10-year Treasuries have not exceeded 3 per cent since November 2018. The last time the two-year yield reached 3 per cent was before the global financial crisis triggered by the collapse of Lehman Brothers in June 2008.

In the past, little attention has been paid to the yield on 20-year Treasuries.It climbed about 9 basis points to 3.01% on Monday, a record since the U.S. Treasury Department resumed issuing 20-year Treasuries in May 2020.

Vishnu Varathan, head of economics and strategy at Mizuho Bank, said:

Such a significant change in such a wide-ranging corner of the market that depends on everything from credit pricing to the determination of 'risk-free returns' may be the reason for the repricing of major risks. I think it is difficult for anyone to escape the sustained and strong change in US bond yields.

Why did it suddenly jump up recently?

Everbright Securities analysis pointed out that this round of jump in US bond yields is driven by three reasons.

First, the Fed's interest rate meeting in March sent hawkish signals of raising interest rates and shrinking the table, superimposing comments by Fed officials and Powell after the meeting that monetary policy could accelerate tightening.The market has stepped up its bet that the Fed may be more hawkish than expected.

In addition, at this meeting, Fed officials raised their forecasts for overall interest rate increases to seven in 2022, three in 2023 and zero in 2024, and the corresponding federal funds rate rose to 2.8% in 2024. Even Brad, the Fed's Eagle King, thinks interest rates should be raised by 50 basis points more than once. This triggered a rapid jump in ten-year Treasury yields.

Second,The recent conflict between Russia and Ukraine has led to a sustained rise in oil prices, leading to a significant rise in inflation expectations.Under the background that the negotiations between Russia and Ukraine have not made substantial progress and the conflict between Russia and Ukraine cannot be resolved in the short term, Everbright Securities expects crude oil prices to remain high in the near future, pushing up upward pressure on inflation expectations.

Finally, the market began to factor in faster-paced and earlier contraction expectations, pushing up the maturity premium.

Everbright Securities pointed out that under the neutral assumption, the final results show that the reduction is expected to reach $510 billion in 2022 and $1.9 trillion in 2023. As a result, the contraction, which could start as soon as May, was gradually priced by the market after the interest rate meeting, which could lead to weaker expectations of demand for US debt, triggering an upside in the maturity premium of long-end Treasuries.

Bank of America Merrill Lynch: pay attention to the tail risk of more than 3%

Bank of America Merrill Lynch believes the fair value of 10-year Treasury yields is in the range of 2.05% to 2.70%. But we should also guard against the tail risk of decoupling from fundamentals and breaking through 3%.

Bank of America Merrill Lynch offers two reasons.First, the market is repricing long-term inflation expectations and neutral interest rates. Second, the challenging supply and demand background exacerbates the recent bearish trend and increases the possibility of overshoot with fundamentals.

The Fed's pricing is set to reach the final interest rate of 3% by mid-2023. While there is a large degree of uncertainty in this benchmark scenario, the risks seem to be more balanced at this point.That means there is limited room for monetary tightening to continue to push down 10-year Treasuries.

Bank of America Merrill Lynch believes that geopolitical risks may continue to rise in the near future, as will concerns about a medium-term recession, which is beginning to be reflected in the dynamics of the curve. In addition, the uncertainty of the volatility of the risk component of the 10-year US Treasury index is still increasing, and the ability to move towards a stable range is relatively limited.

Bank of America Merrill Lynch pointed out that demand is most likely to drive the market to be further bearish on 10-year Treasuries.

But it's worth noting thatThe recent bearish momentum has been largely driven by developed markets in global yields, a framework that highlights the pressure on the US Treasury curve from rising global yields, particularly in developed markets.This development has been particularly pronounced in recent trading days, as global developed market yields appear to have pushed 10-year Treasury yields higher. European interest rates, for example, have raised long-end interest rates by about 150 basis points since December 2021.

Bank of America Merrill Lynch believes that the main risk of rising US bond tail yields is the reset of long-term inflation expectations in the market. This is similar to the mechanism in 2014, when five-year inflation was stable at around 3 per cent and neutral interest rates were expected to be close to 4 per cent.

It is worth noting that five-year inflation expectations are clearly related to the price of WTI crude oil. This process has the potential to reverse the downward trend in long-term inflation expectations after the 2014 commodity crash.

The basic scenario for BofA Merrill Lynch is that long-term inflation expectations will normalize over time and the background of low neutral interest rates will persist. However,A series of driving factors constitute a major challenge to this basic scenario: the outbreak of the COVID-19 epidemic, the disruption of the supply chain, the geopolitical crisis, the peak of the theme of globalization, the weakening of the status of the US dollar reserve currency, and so on.

As this view of lower neutral interest rates and longer-term inflation mechanisms is challengedBank of America Merrill Lynch continues to see a higher interest rate scenario, with US bond yields above 3 per cent, and the neutral interest rate view will be repriced upward as a tail risk, but this risk is worth hedging in the portfolio.

Bank of America Merrill Lynch also believes that the term structure of volatility reflects higher stress levels. In recent weeks, the spread between one-year and 10-year yields has been upside down by more than 30 basis points. Recently, however, the phenomenon of hanging upside down has gradually alleviated, becoming about 10 basis points.In order to further normalize the term structure of US bond yields, the market needs to hedge tail risk and establish expectations at higher range levels.Although the degree of normalization is limited in the short term.

The trend of Treasury yields in the future

Everbright Securities believes that in the future, the above triple factors driving up US bond yields are still likely to continue in the short term.

In the short term, the Fed's focus remains on controlling inflation, and the strength of the hawkish monetary policy of the FOMC will continue to support the rise in US bond yields.

At the same time, high crude oil prices will continue to support inflation expectations in the short term. The details of the contraction table in the minutes of the Fed's March meeting will be further digested by the market, raising the maturity premium and supporting US bond yields.

Everbright Securities points out that in the medium term, the probability that US bond yields will continue to rise is not high. Us bond yields are expected to have room to rise in the short term, but the medium-and long-term trend is still determined by economic fundamentals and inflation expectations.

Looking back at the interest rate hike cycle in 2015, the formal recovery in economic fundamentals was the main reason for the eventual strengthening of US bond yields. ButAt this stage, the prospect of US economic recovery is poor, which can not sustainably support the upward trend of US bond yields.

Everbright Securities gives four reasons:firstThe outlook for each segment of the US economy is not ideal. Due to weakening demand and supply chain constraints, consumption and investment play a limited role in supporting the economy.SecondInterest rate hikes and shrinking tables have led to a tightening of the financial environment, further affecting investment and consumption intentions.ThirdWhen the Federal Reserve raises interest rates, on the one hand, it raises the risk-free interest rate, on the other hand, it raises corporate financing costs and suppresses corporate equity buybacks, thus causing US stocks to face adjustment pressure, further affecting the wealth effect of residents, and then restraining consumption. the formation of negative feedback is not conducive to the US economy.FourthThe US pain Index (Misery Index) shows that the index has reached its level during the recession. In February 2022, the US pain index was 11.67% (80 quartiles since 1978), indicating that high inflation is causing economic pain to American residents at this stage.

Everbright Securities believes that in the medium term, the year-on-year growth rate of inflation will probably fall in the second half of the year, and the risk of inflation expectations continuing to rise is lower.On the one hand, the month-on-month growth rate of core commodity prices has slowed down, and the upward range of core service price inflation is limited. On the other hand, the price of crude oil is more difficult to disturb the subsequent downward trend of inflation. As a result, inflation expectations also provide weak support for US bond yields against the backdrop of year-on-year CPI growth in the second half of the year.

Finally, the Fed's shrinking table reduces the demand for US debt, but in the context of the US Treasury's budget reduction in 2022, the amount of reduction in US bond issuance matches the Fed's shrinking amount.In the medium to long term, there is no upward pressure on the maturity premium.The federal government made sharp spending cuts in 2022, and Everbright Securities expects net issuance of Treasuries to be roughly $1 trillion in 2022, $600 billion less than in 2021.

To sum up, Everbright Securities believes that U.S. bond yields are more likely to rise in the short term from the perspective of Fed monetary policy, inflation, and market expectations. However, in the medium to long term, the fundamentals of the US economy are weak, and the deficit of the US Treasury will be significantly reduced in 2022, reducing the net issuance of treasury bonds, offsetting the impact of the Fed's shrinking table, and peaking with inflation.Treasury yields are likely to come under downward pressure, with 10-year yields expected to fall back to around 2 per cent by the end of the year.

What is the impact on US stocks?

As the panic of the bond market sell-off intensified, the three major U. S. stock indexes are also generally filled with risk aversion. Markets worry that tighter Fed monetary policy, rising inflation and geopolitical risks will be bad for corporate earnings.

Many technology stocks are particularly sensitive to higher interest rates because their valuations are based on expectations of growth for a long time to come. Extremely high inflation forces the Fed to raise interest rates, which could slow economic growth and trigger a recession.The s & p 500 is down more than 6 per cent so far this year, and growth stocks are down nearly 14 per cent, which is more likely to hurt profits in an environment of rising interest rates.

Peter Tuz, president of Chase Investment, said:

In the past month or two, there have been two kinds of selling: a rise in US bond yields, affecting technology stocks and other growth stocks, and a sell-off caused by a recession / slowdown, affecting energy stocks and various materials companies.

Michael Darda, chief economist and market strategist at MKM Partners, pointed outEven with a recent correction, the S & P 500 is still overvalued for now.He believes that for the risk premium for US stocks to return to the five-year average of equity yields minus bond yields, one of four things must happen:Bond yields are down about 100 basis points, corporate profits are up about 20 per cent, stocks are down about 17 per cent, or some combination of three.

Not only the yield on US debt has soared, but also the US debt has been upside down recently. according to CICC's analysis, what is the specific impact of this phenomenon on US stocks?Short-term expectations are particularly important.When expectations are not fully accounted for, they tend to lead to severe volatility in interest rates and markets, regardless of the absolute level of interest rates.

The upward speed of interest rates is also critical, regardless of the level.Bond interest rates rise too fast, which itself represents the increase of bond asset volatility, which is easy to cause cross-asset volatility contagion.From a long-term point of view, interest rates rise and the stock market mostly goes up until the middle and later stages. The transmission path of interest rate to the market is mood, valuation and final profit, so the inflection point of valuation is earlier than that of the market.

CICC believes that there is a threshold for the market to bear the yield on US debt. When the 10-year interest rate on US debt rises to 2.8%-2.9%, the stock-bond ratio returns to the average.

At the same time, interest rates have a long-term correlation with valuations and markets.According to statistics on the relationship between the valuation of the S & P 500 and the 10-year US debt interest rate since 1962, CICC found that the valuation will not shrink until the interest rate reaches a certain "threshold", which has fallen to 1.6% since the outbreak, which explains why US stock valuations have been shrinking since the fourth quarter of last year. But the market "threshold" is higher. The same methodThe threshold that triggers the market inflection point has been around 3% since 2013.

CICC believes that the 2.9%-3% 10-year US bond interest rate may be a more sensitive range, and before reaching this level, the market may still be digested through risk premium and profit cushion. Of course, the above level of static measurement does not necessarily mean that there will be no volatility before it is reached, and changes in sentiment and expectations, as well as the speed of rising interest rates, may still be the cause of volatility.

Zhang Qiyao of Societe Generale Securities believes that US stocks, especially technology stocks, are facing greater downward pressure on earnings in the first and second quarters of this year. Earnings revision at the same time, the second quarter is likely to be the Fed's most hawkish time, may suppress the risk appetite of U. S. stocks.

As inflationary pressures may reach a full-year high in the second quarter of this year, the resilience of demand in the second quarter is still strong, and economic growth is relatively good. The second quarter of this year may be the best time window for the Federal Reserve to control high inflation and concentrate on releasing interest rate hikes and shrinking tables.

From the two levels of valuation and earnings, on the one hand, the downward revision of earnings, on the other hand, the continued tightening of liquidity, or make U. S. stocks face certain fluctuations in the second quarter.