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Rare storm! "U.S. debt volcano" continues to erupt, global risk assets have been severely impacted!
Oct 16,2023
Recently, U.S. bond yields have soared, especially long-term bonds, which the market calls the "U.S. debt volcano" (Bondcano).
In this context, the dollar index rose to 105.7, out of the rare "ten-week Lianyang". At the same time, global risk assets have been hit hard.
"Bear steep" under the U.S. long bond yield or touch 5%
Recently, the U. S. Department of labor released the September non farm employment population changes and unemployment rate data. As of the end of September, the number of non-agricultural employment in the United States increased 336000, which was a substantial increase from the expected 170000, and much higher than the 187000 in August.
Strong economic data overlaid with employment data, increased the Fed's expectations of further interest rate hikes at the end of the year, leading to U.S. bond prices diving, yields pulled up, 30-year U.S. bond yields once exceeded 5 percent, 10-year U.S. bond yields once close to 4.9 percent, continue to refresh the highest record since 2007.
Therefore, it can be said that the current market is clearly trading U.S. debt "bear steep", that is, in the case of rising yields, the long end of the yield upward faster than the short end.
For a long time in the past, U.S. debt was in an inverted state, and today's "bear steep" led to a flattening of the yield curve, which can be understood as "inverted lifting". In a "steepening trade", investors buy short bonds and short longer-term bonds.
In response, Fabio Bassi, head of international interest rate strategy at JPMorgan Chase, said it was a typical end-of-cycle trade and that more people were expected to start preparing for a "steepening trade" in the next quarter.
Analysts say a key factor in this trend is the growing belief that the US economy may avoid a severe recession.
A few months ago, Wall Street investment magnate Bill Ackman voiced a high-profile shorting of U.S. debt, and since then U.S. bond yields have continued to soar (corresponding to falling prices), with 10-year U.S. bond yields rising from near 3.2 percent in May all the way to more than 4.5 percent today, making a lot of bond bulls a huge loss.
Last week, the Fed had to reiterate that it does not rule out the possibility of raising interest rates again this year, and interest rates will remain high for a longer period of time.
The Fed said that while inflation may eventually recede, the market's ability to predict its trajectory has certainly not been stable over the past two years. "So we have to be prepared for a possible 5 percent yield on the 10-year U.S. bond."
The dollar "ten consecutive yang" under the risk assets were sold off.
The dollar has also risen with bond yields, and the dollar index is about to hit a new high in 2023 for 10 consecutive weeks, the first time since 2014.
The surge in U.S. bond yields and the U.S. dollar led U.S. stocks to plunge, led by interest rate-sensitive sectors such as technology, real estate and optional consumer sectors.
As early as last week's interest rate meeting, U.S. stocks began to fluctuate, and the Nasdaq 100 index fell 4.74 percent in the first five trading days as of September 22. At one point during the year, the index rebounded by nearly 50 per cent. In terms of historical data, September was the worst month of the year for U.S. stocks.
For the reasons for the outbreak of U.S. debt, StoneX senior analyst Jerry Chen believes that, first of all, due to the rebound in energy prices and the recurrence of inflation, the Federal Reserve continues to firm its hawkish stance, vowing to maintain high interest rates and tightening policy for a longer period of time.
The latest dot plot suggests that there is still the possibility of an additional rate hike this year and that the number of rate cuts in 2024 could be reduced from four to two.
More importantly, the deteriorating debt burden and uncontrolled debt issuance in the United States have directly impacted debt market liquidity. In the four months after the debt ceiling was suspended in June, the size of U.S. Treasury bonds increased by more than $10000 billion, to a record high of $33 trillion billion.
More worryingly, the vicious circle of "deficit-borrowing-high interest rates-worsening deficits" seems hard to stop.
In addition, Jerry Chen mentioned that the current fiscal management capacity and government status quo in the United States have also discouraged investors from U.S. debt. Although the government shutdown crisis has been temporarily lifted, it is still unknown whether the two parties can negotiate a formal budget as soon as possible due to the removal of the Speaker of the House of Representatives.
Emerging market assets under temporary pressure
Under the pressure of a strong dollar and widening spreads, the data show that emerging markets are under pressure to outflows, excluding dividend dividends,Since 2011, the S & P 500 Index has led the MSCI Emerging Markets Index by 143 percent.
In addition to U.S. stocks, gold is another asset class that has been hit hard by the surge in U.S. bond yields. The strong dollar has dimmed gold's recent decline for eight consecutive days. The CFTC Investor Position Report shows that speculative net long positions in gold are rapidly decreasing.
And recently, gold prices are accelerating downward after falling below $1900 an ounce.
Institutions expect risks to global financial markets to be on the rise."The market is trading the view that the current macro background is not good for the United States and is more bad for other countries." Robertson said.
In the case of China, the inversion of the US-China interest rate differential is close to 180BP, at an all-time high. However, due to the continuous stabilization signal of the People's Bank of China, the RMB has remained near the 7.3 key level against the US dollar in the near future.
According to MSCI data since 2003, the gap between U.S. and Chinese valuations is only as large in the brief period of 2020 and 2021.
As an emerging market, the Chinese market should benefit if the dollar starts to weaken. In addition, a weaker dollar will help stabilize the yuan.
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