To The Moon

These past few days have been rough for US Treasury bears. After last week's hawkish remarks from Warsh, the US 30-year Treasury yield US30Y surged through several consecutive strong candles straight to 5.5%, up from 5.25% just a week earlier. The situation now is that yields above 5% are a memory from a previous generation—even veteran investors with a decade of experience are rookies in this kind of scenario, having never witnessed anything like it since entering the market.

In fact, Bessent began warning Treasury bears about buybacks as early as late August, when the 30Y had just reached 5.3%. Bessent responded by at least doubling the buyback scale for 10-to-30-year Treasuries, forcibly pushing US30Y back down, and deliberately leaked a meeting about buying yen and selling yen. On September 9, Bessent said the buyback money was already prepared—if bears kept selling, he would keep buying. This effectively suppressed Treasury bears for over a month, and even on the day of the September rate hike, US30Y yields fell sharply. Then in just one week, Bessent was taught a lesson by the bears, letting him experience just how powerful a bearish trend can be. Everything Bessent had done before was like fancy footwork—at 5.2%, rhetoric worked; at 5.4%, rhetoric could still hold for two days; but at 5.5%, Bessent did not even want to talk anymore.

Half of the September Script Fell Apart

Let's review what happened over the past two weeks—the rhythm was intense. In early September, nonfarm payrolls came in at 162,000, far exceeding expectations, pushing the rate hike probability above 60%. Then CPI landed, core inflation remained sticky, and Warsh duly raised rates by 25 basis points, subsequently emphasizing continued monitoring of PCE. The market directly priced in another rate hike in December, which ironically restored Warsh's anti-inflation credibility—this was supposed to be the "smoothest path" in the script. On that day, many assets rallied across the board as bad news was exhausted, including gold, Bitcoin, US stocks, Treasuries, and even the Hong Kong and A-share markets. But the script missed one variable: oil prices.

In late September, Iran stirred up trouble again in the Strait of Hormuz, seized a transport ship, and launched military exercises, pushing Brent crude back above $85 in a week. The Houthis counterattacked and effectively blocked the Red Sea. Once oil prices surged, the energy component would directly feed into CPI data for the following months, and December inflation expectations were once again pushed higher. The market did the math: with this oil price, wouldn't rate hikes become a whole series? Are you kidding me? Sell first and ask questions later.

Trump urgently contacted Russia and Ukraine, telling them not to attack each other's refinery facilities, once again delivering the year's best entertainment—the god of oil trading. This September, it happened again: on the day of the ship seizure, Trump issued threats, saying "Iran, you're finished," and oil prices spiked first; three days later, he changed his tune to "we've never been closer to a deal," and Brent crude precisely pulled back near $100. Trump's Brent trading was more textbook than most fund managers. The previous script had Warsh responsible for pulling rate expectations higher to maintain the Fed's independence credibility; Bessent responsible for catching long bonds below to prevent the market from truly being strangled; and Trump cheering on the sidelines—one pulling up, one catching below. The coordination among these masters was actually seamless, a great script. But in this push-and-pull process, once oil prices entered as an additional factor, Treasuries just collapsed. Long bond bears had been praying for rain for a long time, and then a full rainy season arrived—they were grinning ear to ear. And how did the oil price problem start? Those who know, know...

What Does That 5.5% Rate Mean?

For American households, the US 30-year mortgage rate follows US30Y and has already broken above 7.5%. What does that mean? Before 2022, existing homeowners held mortgage rates of 3%. Would you ask them to sell their house, take on a new 7.5% loan, and buy another one? Nobody is moving. So the existing home market is completely frozen—there is price but no transaction. For new buyers, it is either bite the bullet or keep renting. Mortgages, auto loans, and credit cards all get more expensive together, big-ticket consumption freezes completely, houses and cars do not sell, and a whole chain of upstream and downstream industries slows down.

On the corporate side, the damage comes slower but is unavoidable. The low-interest debt issued during the pandemic years is maturing in concentrated fashion over these two years, and refinancing costs have at least doubled. What do companies do? First cut investment, then cut buybacks, and only finally cut people. The damage from high rates to employment typically takes 6-12 months to show—this year's nonfarm payrolls held up, but that does not mean next year's will. Then there is pressure on the government side: the US government now pays over a trillion dollars in interest alone each year, more than military spending, with one-fifth of fiscal revenue going to interest payments. Every step up in US30Y adds another layer to the cost of new issuance and rolling over old debt.

Of course, Bessent can change the debt issuance structure. At the November refunding meeting, the Treasury could explicitly reduce the proportion of long bond issuance and issue more short-term debt. This trick was used in 2019 and 2023, and it forcibly pushed the 30Y back down for a round each time. But the side effect is that the deficit becomes increasingly dependent on short-end financing, just one thin window paper away from "fiscal deficit monetization." The AI industry cannot escape either: data centers are heavy assets, and expansion relies entirely on borrowing. A long-end rate of 5.5% is equivalent to raising the entry ticket price for AI capex by a round. Big players with thick cash flow can still manage, but small companies relying on story-based financing die first. So US30Y rising means money becomes more expensive, which theoretically pressures most industries (except banks). So should most assets fall?

In reality, since last week's rate hike, quite a few global assets have performed quite well—US stocks, Bitcoin, Asian markets, and others. Why this contradiction?

After Rate Hikes Plus Treasury Yields Above 5.5%?

Historically, every time US stocks see their first rate hike, the following six months tend to see gains—except for the continuous hiking cycle in 2022. That is because the first rate hike often occurs when the economy is still strong—precisely because the economy is strong and inflation is showing signs, the Fed acts. From a fundamental perspective, corporate earnings are still rising at this point, and the push from earnings outweighs the pressure from the discount rate. So the signal of a "first rate hike" itself is more like a confirmation letter of economic health. In fact, you can see that after the rate hike, global capital accelerated its concentration into AI, and the US PMI reading of 58 is quite an exaggeratedly good number, with new orders data absurdly high. Such economic data makes it hard to create a big hole in US stocks because many companies' fundamental EPS is too strong—once valuation is killed, they just continue rising on earnings.

In the current macro state, Warsh's 25bp September hike qualifies as a "conditional hike"—inflation is sticky but not out of control, closer to the preventive logic of 1994. In practice, as long as oil prices do not persistently stay above $100, the market will not price in malignant inflation—the market knows this. For the US economy, even at this rate level, there will not be much short-term impact. However, the only uncontrollable factor here is actually Middle East oil prices. This is a political issue, and it is hard to have an accurate take. One can only say that if this matter is not resolved, it will be hard for large capital to persistently buy assets, so the market will likely enter a state of shrinking volume and waiting.

On the other hand, purely from a liquidity framework perspective, when liquidity tightens, top-tier assets do not die first—the ones that die first are always the back-row assets. The 5.5% Treasury yield is the global asset pricing anchor. The process of raising the anchor is more about increasing liquidity pressure, but it does not directly turn the market into a bearish trend. So what everyone sees is that in the past two weeks, US stocks actually did not show much negative feedback. Instead, domestic capital agonizes over this and that every day, scaring itself half to death, while core growth directions have basically not changed much.

The 5.5% on the 30Y—during this period, what contributes more to Treasury yield moves is economic growth, not rising inflation. In fact, the impact on the market is temporarily limited, and even because of tightening liquidity, everyone's capital will accelerate concentration into AI companies. Looking closely, the market structure actually fits the previous trend even better under high rates. Rates above 5% are just a reminder that the low-rate era is dead and buried. Some companies that previously looked decent will become mediocre in this high-rate environment. The only option is to accelerate the concentration of precious capital into certain directions, reserving positions for companies in each industry that are more certain, more extreme, and better at cost efficiency—achieving better focus. We have already sorted out these lists and targets.

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