It all stems from a "catastrophic" auction of seven-year Treasuries.

Jinshi data has repeatedly reported that Nomura Securities predicts that if benchmark US bond yields hit 1.5 per cent, it will trigger a sell-off in risky assets. This happened in the market last night. It all stems from a "catastrophic" auction of seven-year Treasuries.

The US Treasury auctioned $62 billion of seven-year Treasuries on Thursday, but the subscription ratio for measuring demand hit an all-time low of 2.04, well below the average of 2.35 in the previous six auctions. this includes the worst allocation of indirect buyers to foreign central banks (38.06 per cent) since 2014. The winning interest rate is 1.195%, which foreign media say is the highest bid closing rate since February.

Meanwhile, direct buyers (direct buyers), including the Federal Reserve and other federal government entities, were allocated 22.1% of total sales, the highest since June 2020, while the proportion of primary dealers (primary dealers) with obligations to buy Treasurys that failed to auction to prevent abortions at auctions rose to 39.81%, the highest since 2014.

Zero hedging commented that the results of such auctions showed that suddenly no foreigners wanted to touch US debt, which was definitely the most embarrassing and disastrous moment in the seven-year Treasury auction in many years. To make matters worse, the result is ill-timed, as U. S. bond yields are rising because of inflation fears in the markets.

Sure enough, after the results were released, US bond yields of all maturities soared, with 10-year US bond yields rising above 1.5% and 1.6% in intraday trading, rising more than 20 basis points in the day.

At one point, the yield on five-year Treasuries soared to 0.8617%, up about 26 basis points on the day. At one point, the yield on two-year Treasuries rose to 0.1877%, up about 6 basis points on the day. At one point, the yield on 30-year US Treasuries hit the 2.4 per cent round mark and hit an one-year high, rising about 16 basis points on the day. At one point, the spread between two-year and 10-year US debt widened to 141 basis points, the largest spread in more than five years.

At the same time, U. S. stocks also collapsed, with the Nasdaq down 3.9% on the day, leading three major u.s. stock indexes down, and the Dow, which hit an all-time high on Wednesday, fell nearly 670 points. The s & p 500 fell more than 2.8% when it hit a session low. At the close, the Dow was down more than 500 points, the S & P had its biggest drop in a month, and the Nasdaq posted its biggest drop in four months. VIX soared by more than 40% and pushed up to 30 integer digits.

At one point, gold fell nearly $40 from the day, losing the $1770 / oz mark, falling as low as $1765 / oz and falling more than 2 per cent on the day.

Zero hedging also calls for the Fed to introduce yield curve control.

Peter Boockvar, chief investment officer of Bleakley Advisory Group, described the auction as "terrible" and pointed out that the proportion of bonds held by traders was much higher than the 12-month average, reflecting weak demand.

Dennis DeBusschere, a strategist at Evercore ISI, points out that this is "The total collapse of the bond market. As a result, this idea permeates all other aspects. It looks like there has just been a flash of volatility in the bond market. "

Liddell, an Allianz global investment analyst, said it was reminiscent of the market sell-off in 2013, when yields soared because traders thought the Fed would withdraw its stimulus. "the lesson of the interest rate storm is that it's not just bonds. Every asset class will be affected.

Analysts also point out that forced selling in the $7 trillion mortgage-backed bond market has exacerbated the turmoil in the US bond market, and these sellers may be reducing their holdings of long-term bonds or adjusting their derivatives positions. in response to an unexpected extension of the duration of its mortgage-backed bond portfolio.

This phenomenon is called convexity hedging. This extra sell-off at a time when the market is already weak has repeatedly exacerbated the upward trend in Treasury yields throughout history, most notably the major "convex events" of 1994 and 2003.

But Fed officials still declared in unison on Thursday that there was no need to worry about rising yields, a sign of economic optimism.

Several Fed officials said on Thursday that the surge in US bond yields reflected market optimism that the economy was coming out of the COVID-19 crisis and stressed that the central bank had no plans to tighten policy prematurely.

St. Lewis Fed Chairman Brad: the rise in yields may be a good sign because it does reflect improved growth prospects and inflation expectations in the United States and bring the latter closer to the committee's inflation target.

Kansas City Fed Chairman George: the partial rise may reflect growing optimism about the recovery and can be seen as an encouraging sign of rising growth expectations.

Atlanta Fed Chairman Bostick: long-term bond yields do fluctuate, but I'm not worried about that at the moment. I don't expect the Fed to respond to higher yields.