① The 10-year US Treasury yield climbed to a 16-year high of 5.001% overnight; ② The benchmark yield has surged by a total of about 27 basis points this week. One reason is that investors expect the Fed's interest rate to “remain at a high level for a longer period of time”; ③ the current “US debt storm” is likely to further disrupt all related markets, from stocks to real estate.
On Thursday (October 19), the benchmark 10-year US Treasury yield hit the 5% mark for the first time since July 20, 2007. Breaking through this important integer mark marks another new milestone in the process of rising US borrowing costs...
Known as the “anchor of global asset pricing,” 10-year US Treasury yields are often viewed as a key reference for changes in global borrowing costs. According to Reuters quotes, 10-year US Treasury yields climbed overnight to a 16-year high of 5.001%It finally rose 9 basis points to 4.99% at the end of the day.
The benchmark yield has surged by a total of about 27 basis points this week because investors expect the Fed's interest rate to “remain at a high level for a longer period of time,” and at the same time, the industry is also increasingly concerned about the market's ability to handle the US government's huge debt issuance.
On Thursday evening, Federal Reserve Chairman Powell delivered his final key speech before the November interest rate meeting at the New York Economic Club. His series of remarks indicated that the Fed would stand still again at the next meeting, but Powell also stressed that if policymakers see further signs of strong economic growth, it is possible to raise interest rates again.
Powell said that US inflation is still too high, and the path to fighting inflation may be bumpy and take some time. The Fed is committed to sustainably reducing inflation to 2%. Achieving this target may require a period of below-trend economic growth and further weakening of labor-market conditions.
“(Powell)'s remarks today were definitely a major factor in raising interest rates to 5%,” said Noah Wise, portfolio manager at Allspring Global Investments.
Wise said, “Powell emphasized the strong economic growth data and retail sales data that everyone has seen. He also said he is satisfied with the austerity policy due to higher long-term interest rates, even if this means that short-term terminal interest rates may not need to be that high.”
It is worth mentioning that as 10-year US Treasury yields hit the 5% mark overnight, this also indicates that in the current overall US Treasury yield curve (from 1-month to 30-year terms), only 5-year US Treasury yields have yet to reach the 5% mark.
In terms of other term yields, by the end of the overnight New York session, 2-year US Treasury yields fell 6.2 basis points to 5.169%, 5-year US Treasury yields rose 2.6 basis points to 4.967%, and 30-year US Treasury yields rose 11.4 basis points to 5.115%.
Does the “anchor of global asset pricing” break 5 and threaten to further disrupt the market?
Undoubtedly, with the continued sell-off of US Treasury bonds, the yield reached its highest level in more than 16 years,The current “US debt storm” is likely to further disrupt all related markets, from stocks to real estate.
Since the $25 trillion treasury bond market is considered to be the cornerstone of the global financial system, the impact of soaring US government bond yields is bound to be extremely widespread. Higher yields on US Treasury bonds will tighten financial conditions, thereby increasing the cost of credit for businesses and individuals, and thereby curbing investors' interest in stocks and other risky assets.
The S&P 500 index is currently down about 7% from this year's high, as promises of guaranteed yields on US government debt have lured investors away from the stock market. At the same time, mortgage interest rates have also reached their highest level in more than 20 years, putting tremendous pressure on the US real estate market.
Gennadiy Goldberg, head of US interest rate strategy at TD Securities (TD Securities), said, “Investors must take a very serious look at risk assets. We maintain the view that 'the longer the higher the interest rate, the more likely it is that there will be a problem. '”
In fact, in recent months, Tesla CEO Musk has warned many times that high interest rates could weaken demand for electric vehicles. Meanwhile, the sharp rise in US bond yields hit the industry's stock price on Thursday, along with Tesla's latest earnings report, which is mediocre. Tesla's stock price closed down 9.3% on the same day, as some analysts questioned whether the company could maintain the rapid growth that has been drastically different from other automakers over the years.
As investors are attracted to the high yields offered by US Treasury bonds, high-paying stocks in industries such as utilities and real estate have also recently been hit hard. Investors who have held these bonds for a long time are now generally able to obtain interest rate returns higher than 5%, leaving many of the more attractive high-dividend stocks that are usually attractive.
In the foreign exchange market, since US Treasury yields accelerated in mid-July, the US dollar has risen by an average of about 6.4% against G10 currencies. The ICE dollar index, which measures the strength of the US dollar against the six major currencies, is now close to its highest point in 11 months.
A stronger dollar would help to tighten the financial environment and could damage the balance sheets of US exporters and multinational companies. Globally, this has complicated efforts by other central banks to curb inflation by depressing local currency exchange rates.
In recent weeks, traders have been watching for possible intervention by Japanese officials to curb the continued depreciation of the yen. Since this year, the yen has declined by 12.5% against the US dollar cumulatively.
The decline in emerging market stocks and bonds has also deepened recently, as rising US Treasury yields and concerns about a wider conflict in the Middle East have prompted investors to sell riskier assets.The MSCI Emerging Markets Stock Index fell by more than 2% this week, while most emerging market currencies weakened one after another.The emerging market currencies most relevant to the global macroeconomic outlook — the Korean won and the South African rand — have recently become the two most declining currencies.
Bank of America global research strategist Athanasios Vamvakidis said in a report on Thursday that in the current cycle of policy tightening, the correlation between the US dollar and interest rates has always been positive and strong.
Furthermore, in terms of the credit market,As US Treasury yields soared, interest spreads in the credit market also widened further.Investors demand higher yields from high-risk asset investments such as corporate bonds. The rise in yields brought the ICE BofA High Yield Index (ICE BofA High Yield Index) close to a four-month high, increasing financing costs for potential borrowers.
Will the US debt storm continue after hitting the 5% mark?
Of course, as far as global financial markets are concerned, everything that has happened in the past is irreversible, yet the most critical question right now is undoubtedly: after the 10-year US Treasury yield hits the 5% mark, will the bond market sell-off storm continue to rage in the future?
What is quite interesting is that after reaching the “milestone” of 5% yield, the current mood in the bond market is not particularly pessimistic.On the contrary, some well-known industry institutions and bosses think that a high yield of 5% may provide a good opportunity for people to enter and allocate US debt.
Michael Schulman, chief investment officer of Running Point Capital Advisors, said, “I think 5% is a psychological threshold, but for over a year, I've been telling my clients that we are in an environment where interest rates are higher and longer. Inflation will continue, be higher than in the past, and interest rates will rise accordingly.”
Schulman pointed out, “Some people see this figure (5%) and may worry that the situation will get worse... but at the same time, there are others who see this high yield level and will think that historically speaking, now is the time to invest.”
Morgan Stanley is unquestionably the latter right now.Morgan Stanley Investment Management said this week that if the 10-year US Treasury yield hits 5% or higher, this is a good entry opportunity for investors.
Vishal Khanduja, the Boston-based fund manager and co-head of the general market fixed income team at Damo, said that under the current circumstances, these levels would be an opportunity to lengthen the portfolio for a long time. If the yield exceeds 5%, the US debt will deviate from the fair value they have determined.
In addition to thinking 5% is a good entry point, Khanduja also favors trading where the curve is steeper. Morgan Stanley Investment Management is currently setting a steeper layout between 2-year and 10-year US Treasury yield curves. Khanduja said, “We definitely think it will reverse and return to the regular spread, but I think it will take a little longer”. Damo currently believes that the Fed may only cut interest rates at the end of 2024 or the beginning of 2025.
Furthermore,Jeffrey Gundlach (Jeffrey Gundlach), the founder of Double Line Capital and known as the king of new debt, also posted a post on Thursday calling on investors to buy long-term US debt.Gundlach pointed out that with the end of debt issuance and tax deferral, consumers will have to slow down their lifestyle. This may be a favorable factor for the bond market. The market will no longer have that much supply, and may also have a negative impact on the economy, leading to a rebound in bond prices over the next six months or so.
Editor/Somer
