Economic Observer Reporter Cai Yuekun On September 28, 2022, the yield on the 10-year U.S. Treasury bond hit a high of 4.022% since October 2008.
, by comparison, China's 10-year Treasury bond yield is 2.755%. The yield on 10-year Treasury bonds in China and the United States is inverted by more than 120BP.
The inverted U.S. bond yield intensified
Not only that, the yield of the U.S. 10-year Treasury bond is inverted with the 2-year and 5-year Treasury bond yields. Among them, the yield of 5-year US bond rose to around 4.22%, the yield of 2-year US bonds was around 4.26%, and the 10-year US bonds was around 4.0%, with inverted ranges reaching 22bp and 26bp respectively.
In comparison, Wind data shows that as of September 28, China's 10-year treasury bond yield was around 2.75%, 5-year treasury bond yield was around 2.49%, and 2-year treasury bond yield was around 2.01%. China-US bond yields are intensifying inversion.
China-US 10-year Treasury bond yield interest rate spread inverted significantly
Data source: Wind, Oriental Jincheng
In response to the inverted interest rate of China-US bonds, a bank interest rate bond trader analyzed to reporters on September 28 that it was mainly because my country's currency "mainly me". Because of the current loose credit transmission block, the economy is slowly recovering at the bottom, and the pressure of real estate decline remains, so the central bank does not have the basis for tightening monetary policy, so the investment in the domestic bond market is still mainly based on domestic fundamentals.
The trader analyzed that in the face of uncontrollable inflation, the Federal Reserve continued to tighten the rate hike, but the economy was affected by excessive rate hikes, resulting in the inverted long-term and short-term yield curve of US Treasury bonds. Overall, monetary policy tightening has an impact on both long and short ends.
A week ago, on September 21, Eastern Time, the Federal Reserve raised interest rates by 75 basis points as scheduled to 3.0%-3.25%; the third consecutive rate hike was 75 basis points, with a cumulative interest rate hike this year of 300 basis points, the most intensive interest rate hike since 1981, and also raised the U.S. Treasury bond interest rate to the highest level since the 2008 financial crisis. The Fed's continuous interest rate hikes continue to push up the yield on the 10-year U.S. Treasury bonds.
The above-mentioned bank interest rate bond trader analyzed that the Fed rate hike caused the USD index to continue to rise, triggering capital outflows in emerging economies and leading to turmoil in global capital markets. The recent decline in domestic stocks, bonds and foreign exchange rates has been seen in varying degrees, mainly due to the Fed's interest rate hike that has caused investors to worry about liquidity.
The Federal Reserve continues to raise interest rates, which is closely related to high U.S. inflation.
CITIC Securities Mingming Bond Research Team believes that the disclosed data shows that rising U.S. inflation risks have led to a jump in 10-year U.S. bond interest rates. The leading indicator of U.S. inflation, the year-on-year growth rate of labor costs in non-farm units, hit a new high since March 1982, pushing up the risk of a spiral of wages and prices. At the same time, although the price index of PMI hit the lowest level since June 2020 in August, its impact on inflation was relatively lagging (about 9-12 months behind), and there is a risk of further rising energy prices in the coming of winter. The decline in commodity prices this year is relatively uncertain. The sharp rise in the PMI employment index shows that the risk of US wage inflation is still high.
In addition, China Merchants Securities fixed income research analysis believes that the Fed's interest rate hike path is to fight against high-stick inflation. With the decline in oil prices, the year-on-year growth rate of US CPI and PPI in August both declined, but excluding food and energy, the terminal prices faced by consumers are quite sticky. Core inflation not only continued to rise year-on-year, but also exceeded market expectations. Core CPI in August increased by 6.3% year-on-year, expected to be 6.1%, and the previous value was 5.9%.
In addition, China Merchants Securities fixed income research stated that the "rental cycle" is an important reason for the high core inflation in this round of US. In the core CPI, rental prices rose by 6.2% year-on-year, hitting a new high since 1991 and a month-on-month increase of 0.7%. Rent contributed more than 40% of the increase in core CPI in August. Among the remaining projects, the year-on-year increase of furniture, household products, medical care, automobiles and used cars is not small: 9.9%, 5.4%, 10.1% and 7.8%. The rise in rent prices is closely related to the rise in labor costs. Previously, large-scale monetary easing in the United States and tight labor markets have prompted US wage levels to continue to rise.The rise in wage levels and high viscosity have driven the rise in rent prices. When will
hit the top?
Regarding the current configuration, the aforementioned trader admitted that there are currently fewer allocations of interest-rate bonds because the yield has declined too much and the absolute yield level is too low. Moreover, there is still a lot of pressure to adjust interest rate bonds in the future. In addition, overseas negative news and domestic policies to loosen credit and stabilize growth have been introduced one after another. Therefore, there are currently few funds allocated, and we are gradually waiting and watching the subsequent changes in policies.
However, US bond yields continue to rise, highlighting the allocation value. Huatai Securities Fixed Income believes that under the logic of global difference, US bonds begin to have allocation value. From a horizontal perspective, the 10-year U.S. Treasury yields are significantly superior to traditional safe assets, even exceeding the high-grade credit bonds in some countries; from a historical vertical perspective, the 10-year U.S. Treasury yields are both at a high level, both the nominal interest rate and the real interest rate. However, the Federal Reserve continues to raise interest rates and "higherfor longer" is still the main upward risk facing US Treasury yields. The Federal Reserve's policy interest rate may reach 4.5% or even higher. In addition, the liquidity of the US Treasury market continues to deteriorate under the acceleration of balance sheet reduction and , US Treasury yields do not rule out the possibility of further upward in the medium and short term.
In addition, regarding the potential risks brought to emerging markets by the Federal Reserve's continuous interest rate hikes, according to statistics from United Credit Data, the pressure of US dollar return to emerging economies is currently at a historically high level. A large amount of arbitrage funds flowed back from emerging economies to the US bond market to gain short-term stable and high returns. From April to July 2022, the total international capital outflow from emerging economies' stock markets was nearly US$40 billion. The MSCI Asia-Pacific Composite Index fell by more than 22% year-on-year, and has fallen into a technical "bear market". With the emergence of the Fed's continued strong interest rate hike effect in September, the financial risks faced by emerging markets may further increase.
Oriental Jincheng Research and Development Department said that in the short term, the market's phased recession sentiment may cause US Treasury yields to show a high fluctuation. However, in the long run, as the downward pressure on the fundamentals of the US economy is prominent and may fall into a substantial recession in the second half of next year, the 10-year U.S. Treasury yield will gradually turn to a downward trend.
Oriental Gold Research and Development Department believes that in the short term, considering that the long-term interest rates of US bonds still have room for continued upward rush, and the long-term interest rates of China bonds are expected to continue to fluctuate in the low level narrow range, the inverted interest rate spread of China and the United States may further intensify.
The above-mentioned bank interest rate bond trader also analyzed to reporters that it is possible to further rise in the short term when the Federal Reserve's interest rate hike cycle has not ended.
