The Resilience of U.S. Treasury Bonds and the Long-Term Outlook

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Introduction

In the beginning of this year, there were claims from various institutions that the current interest rates in the United States had reached a relatively high level, signaling the end of the Federal Reserve's rate-hiking cycle. However, this assertion was soon contradicted. Even when some banks, including Silicon Valley ones, faced liquidity issues due to their asset structures in March and April, it didn't deter the Fed from pursuing its rate hikes. 

Although, in its meeting on September 21st, the Federal Open Market Committee decided to maintain the benchmark interest rate within the range of 2.25% to 2.50%, temporarily pausing the rate hikes. Nevertheless, some institutions still anticipate another rate hike from the Fed within this year.

The Fundamentals

What truly matters is not what they say but what they do. External indicators or market sentiment serve as references for the Federal Reserve's open market operations rather than the sole reasons for their decisions. The foundation of the Fed's interest rate actions lies in crucial macroeconomic indicators such as inflation, employment rates, and economic growth. Monetary policy often exhibits a certain lag in its transmission mechanism, meaning that the current levels of inflation or market employment rates may reflect the outcomes of open market operations from earlier this year or even the last quarter of the previous year rather than the results of the rate hike in July.

Market Response and Confidence

Despite the repeated increase in the U.S. debt ceiling, the long-term yields of U.S. bonds have been steadily rising. Since hitting historic lows in 2020, the 30-year U.S. Treasury bond yields have made a strong comeback, even approaching the levels seen around 2010, almost 13 years ago. This can be seen as a response to the Fed's rate-hiking policies and a reflection of market confidence in the U.S. dollar and U.S. assets.

Speculation and Reality

During the holiday season, even prominent investors like (Banxia Investment) have expressed a long-term bearish outlook on the U.S. dollar. While this perspective may be comforting to the general public, it holds limited significance for genuine investors and speculators. Every business model and development pattern, whether for a company, a nation, or an individual, has its lifecycle. No business model can remain stable indefinitely (unless it enjoys an absolute monopoly), and no enterprise can remain perpetually dominant in every aspect. Just as the British pound gradually lost its leadership position after World War II, the U.S. dollar will eventually yield its dominance. However, that day is not today, not now, and perhaps not in the near future. Hence, U.S. bond yields, much like the U.S. dollar, remain resilient.

The Road Ahead

In the coming period, the global economy is likely to undergo a new round of reshuffling and iteration. Post-World War II, as globalization advanced, the global division of labor expanded, fostering the prosperity of international trade and economic efficiency growth. However, with the rise of protectionism, especially within the United States itself, the international economic landscape may shift in a different direction.

Conclusion

History moves in a spiral, always progressing upward. Therefore, whether it's another major economic entity challenging the U.S. dollar's supremacy as the British pound did in its time, it will undergo a lengthy process. Consequently, whether in the short term or medium to long term, U.S. Treasury bonds are expected to maintain an upward trajectory, and U.S. Treasury bond ETFs will remain steadfast.

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