The CME volatility index CVOL, which measures 30-day implied volatility on US Treasuries, shows that volatility in the US bond market rose sharply in October, with the index briefly approaching 140, a new high since March.
Driven by stubborn inflation and an ever-widening fiscal deficit, the structural uptrend in yields that began five years ago is accelerating. October saw a selloff in US Treasuries, a full repricing of risk on 10-year and 30-year long bonds, and a continued heating up of the debate over US fiscal sustainability.
Sticky inflation forces higher rates, and the market is clearly underestimating inflation risk
Brusuelas, chief economist at RSM, said the US will keep issuing more Treasuries to support economic expansion and defense spending, with the fiscal deficit staying in the 5% to 6% range. Deficits combined with high inflation will push yields further up.
RSM's model estimates show that even if rates rise to 5.5% or even 6%, inflation does not fall noticeably, producing only a mild slowdown in the economy and employment. He believes the market underestimates the resilience of inflation, and the Fed also underestimates the tightening needed to stabilize prices.
It is not just the US. Bonds of several high-deficit G7 countries are under simultaneous pressure, and France's debt risk has already sparked concerns about a European bond crisis.
Huge debt maturities concentrate refinancing, and interest expense pressure surges
Steve Shaw, founder and president of BondSavvy, said net issuance of US Treasuries will grow by more than 40% this fiscal year, to about $1.2 trillion, and issuance will remain high next year, with total federal debt set to exceed $40 trillion.
The real problem is the refinancing wave. During the pandemic, a large amount of debt was issued with coupon rates near zero, and it will mature and be replaced in a concentrated way over the next two years. Even if the Treasury prefers to issue 1-year, 2-year and 5-year short-term debt to control interest costs, overall interest expense will still rise significantly after replacement with higher-rate new debt.
In October, the US 10-year Treasury yield hit 5.36%, the highest since 2002, while the 30-year yield broke above 5.7%. Several Treasury auctions saw weak demand, and the large buyback operation in August also failed to effectively boost demand. Some major overseas buyers of US Treasuries continued to cut holdings, reflecting overseas investors' concerns about high deficits, stubborn inflation and geopolitical uncertainty.
Overseas buyers keep reducing holdings, and the market is divided on the timing of a US debt crisis
Billionaire investor Ray Dalio judges that US Treasury selling pressure has room to worsen. Major Asian economies are no longer willing to keep adding to US Treasuries, and given both geopolitical and economic factors, Japan is also seeking to recover funds it previously deployed.
Data show that in July Japan's US Treasury holdings fell by $12.8 billion to $1.1 trillion; over the same period, major Asian economies' holdings dropped to $618 billion, far below the 2013 peak of $1.3 trillion.
Of course, the CME FedWatch tool shows the market continues to price further rate hikes, and historically high coupons during tightening cycles have also periodically attracted overseas money back. Brusuelas cautioned that this return logic may weaken in the short term, and the subscription situation in upcoming Treasury auctions needs to be tracked continuously.
Treasury Secretary Scott Bessent has already moved to reassure the market, using spending restraint to bend the Treasury issuance curve and push down long-end yields.
The fiscal path has not collapsed, but the long-term direction is unsustainable
Oliver Allen, senior US economist at Pantheon Macroeconomics, said the US still has multiple tools to adjust debt, such as cutting spending, using cash reserves, and prioritizing short-term debt issuance to lower interest costs. There is no crisis tipping point yet, but the country is on an unsustainable path.
He noted that former Treasury Secretary Janet Yellen missed the chance during the pandemic to lock in long-term low rates and only replaced short-term Treasury bills, leaving today's long-term interest burden. Over a multi-decade horizon, the cumulative effect of high deficits and interest burdens will gradually show, but the US still has time to adjust fiscal policy.
Market views are also divided. Ethan Heisler, editor of the Bond Industry Newsletter, believes US Treasuries remain attractive given the dollar's status as the global reserve currency. Allison Schrager, a senior fellow at the Manhattan Institute, argues that increased supply of high-rated European bonds will divert funds, while a default by an AI giant would send money back into Treasuries as a safe haven.
CME continues to enrich its derivatives toolkit, with average daily volume in US Treasury futures options up 25% in the third quarter, and it will also launch the TreasuryLink product to help traders hedge yield curve risk.
Conclusion
US Treasuries are under multiple pressures: rising yields, higher volatility and weaker overseas buying. The core conflict comes from the resonance of fiscal deficits, concentrated refinancing and high inflation.
At present, US finances have not yet erupted into a crisis, but the long-term path urgently needs adjustment. Upcoming Treasury auction results, overseas capital flows and the Fed's policy signals will continue to dominate the direction of long-end yields and will also steer global asset pricing.
10-year US Treasury yield weekly chart. Source: Yihuitong. As of 13:41 Beijing time on November 13, the 10-year US Treasury yield stood at 5.128%.
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