US bond yields above 5% won't last, ETFs like TLT are bottoming?

The two-year Treasury yield $2-YR T-NOTE - main 2312(ZTmain)$ , which moves with interest rates expectations, rose 0.09 percentage points to 5.20%, its highest level since 2006. The U.S. 10-year Treasury yield $10-YR T-NOTE - main 2312(ZNmain)$ is also at a high this year, exceeding 4.8%.

Why do U.S. bond yields $2-YR T-NOTE - main 2312(ZTmain)$ continue to rise? What impact will it have on the U.S. economy and the prices of financial assets such as the $USD Index(USDindex.FOREX)$, $S&P 500(.SPX)$ , $WTI Crude Oil - main 2312(CLmain)$ , and $Gold - main 2312(GCmain)$ ?

In short: the Federal Reserve is reducing its holdings of U.S. debt, and foreign countries are also selling U.S. debt. The imbalance between supply and demand for U.S. debt has caused yields to continue to rise.

On the economic front, it will lead to a significant tightening of the financial environment, which will drag down U.S. GDP growth, increase corporate financial costs, increase the risk of corporate bond defaults, and contribute to economic weakness. If bond yields remain high for a long time, a recession in 2024 will occur. The risks are even more severe.

As for the prices of major financial assets: the U.S. dollar is still strong as the U.S. economy is still resilient, crude oil is expected to remain strong amid production cuts and geopolitical factors, and gold and copper prices may have difficulty gaining momentum until inflation continues and interest rates are cut. For bond ETFs, once U.S. bond yields fall, bond and bond ETF assets may rise.

So when will U.S. bond yields turn lower?

HSBC Asia Private Bank believes that U.S. bond yields are already at the top, but the risk of "overshooting" is still not ruled out in the short term. 5% may be a key point. Once U.S. bond yields turn lower, bond prices will rise, and related ETFs may be worthy of early bullish bets. $iShares 20+ Year Treasury Bond ETF(TLT)$ , $iShares 10-20 Year Treasury Bond ETF(TLH)$

Analysis: US bond investors eked out positive returns, see better second half year | Reuters

I found this two articles from @TopdownCharts are worth reading:

• Off-Topic ChartStorm: US bonds are looking cheap

• Off-Topic ChartStorm: Everyone Knows Bond Yields are Going Lower

Below are some expanded statements on the above:

1. What are the reasons for the continued rise in U.S. bond yields?

According to analysts, there are 3 main factors that influence long-term U.S. bond yields: economic fundamentals, inflation expectations, and term premiums.

• With U.S. economic fundamentals proving robust, the market expects the Fed to keep interest rates high for longer.

• Since Biden signed the debt ceiling bill in June 2023, the U.S. Treasury has used massive debt issuance to replenish the balance in the TGA account, which had previously fallen to a low. In Q3 of this year, the U.S. Treasury issued $1 trillion in bonds, exceeding expectations. The supply surge upset the original balance of supply and demand.

• A quiet cooling has also been observed on the demand side of U.S. bonds. The "buyers" of U.S. debt are mainly the Federal Reserve, overseas investors, and domestic investors in the United States. In the United States, the Fed is conducting quantitative tightening by reducing its holdings of U.S. bonds, and its holdings have declined by $121 billion since 2022; overseas, emerging markets are having to sell U.S. bonds to defend their exchange rates.

Against this backdrop, U.S. government bond auctions have cooled somewhat, and U.S. bond yields have accelerated their rise following poor demand data.

2. The impact of rising U.S. bond yields on the U.S. economy:

• If long-term bond yields in the U.S. remain at current high levels, this will lead to a significant tightening of financial conditions that may substitute for the role of further "rate hikes" and slow U.S. GDP growth. To some extent, this will also reduce further income growth in the near term. the need for tight monetary policy.

• The current high-interest rate environment will impose tighter credit conditions and high-interest costs on corporations, particularly U.S. companies that have primarily floating rate capital structures. At the same time, U.S. corporate bonds will enter a "peak" maturity" between 2024 and 2026. Moody's indicated in an Oct. 12 report that nearly $1.3 trillion in prime corporate bonds will mature in 2024. Companies rated "junk" will have $1.87 trillion in debt maturing between 2024 and 2028. Under the market consensus of "high-interest rates over the long term," the risk of default on U.S. corporate bonds is also gradually increasing.

• If yields continue to rise or even remain at the current high for an extended period of time, economic weakness often occurs and the risk of a U.S. recession in 2024 will be greater and longer.

3. The impact of U.S. bond yields on major categories of financial assets

• $USD Index(USDindex.FOREX)$ : Considering that the U.S. economy remains resilient and U.S. inflation has not declined significantly or even recovered slightly in the short term, the U.S. dollar is expected to remain strong.

• $Gold - main 2312(GCmain)$ : Given that the U.S. economy is still resilient, U.S. inflation has not fallen significantly, and the likelihood of interest rate cuts in the near term is low. Against this backdrop, gold's near-term upside momentum is likely to be limited.

• $WTI Crude Oil - main 2312(CLmain)$ : As a result of the production cuts, there will be some supply-side effects in the short term. At the same time, economic growth in the U.S. remains robust, and the global manufacturing purchasing managers' index is showing signs of bottoming out and picking up. Crude oil prices are expected to remain strong.

• $Copper - main 2312(HGmain)$ : current supply is relatively stable. Although the U.S. economy is resilient on the demand side, it remains constrained in an environment of high-interest rates and high inflation. In the short term, upward momentum is limited.

• $S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $DJIA(.DJI)$ : In the short term, the U.S. economy is still the central variable; in the medium term, as the U.S. economy slows, the central variable for a reversal at the bottom of the market will shift to expectations of Fed policy easing.

• $2-YR T-NOTE - main 2312(ZTmain)$ $10-YR T-NOTE - main 2312(ZNmain)$ : For bonds, a rise in yields means a fall in prices. Once yields fall, bond prices can be expected to rise, and the corresponding ETFs are also worth paying attention to in advance.

4. Some ETFs you should watch out for

• U.S. Treasury Bond ETF

$iShares 20+ Year Treasury Bond ETF(TLT)$, the most popular long-term U.S. Treasury bond ETF in the United States. Although the long-term investment return is not high, it is a good choice for investors looking for short-term returns. High-Performance ETF Product. This product contains hundreds of long-term government bonds and is highly liquid. The same as $iShares 10-20 Year Treasury Bond ETF(TLH)$

• U.S. Municipal Bonds

$iShares National Muni Bond ETF(MUB)$ this ETF invests in investment grade U.S. municipal bonds. Municipal government bonds are exempt from federal taxes and therefore have lower yields than regular bonds.

• International Government Bond ETF

$Vanguard Total International Bond Index Fund ETF Shares(BNDX)$ invests in bonds issued by governments outside the United States.

• International Corporate Bond ETF

$SPDR Bloomberg International Corporate Bond ETF(IBND)$ , invests in non-U.S. investment grade corporate bonds