To The Moon

After a brief retracement, the 10-year U.S. Treasury yield surged again last week, briefly above 5.0% during intraday trading. This marked the first time since 2007 that it reached this psychologically significant level.

There’s also some anomalies, such as the market's expectations for a rate hike in November not increasing but instead decreasing, and gold surging.

Why Yield Surging?

The recent increase in interest rates since July has four distinct features different from the past: real interest rate contributions, dominant term premiums, a steepening yield curve, and simultaneous strengthening of US bonds and the US dollar.

This indicates that the driving force behind the rise in interest rates is increased economic resilience and increased bond supply (backed by fiscal expansion), rather than changes in the inflation path or the path of interest rate hikes.

1. Real interest rates still dominate, driven by recent economic data that has once again exceeded expectations, not inflation.

2. Term premium remains the primary contributor, driven by concerns over the potential for further expansion of U.S. fiscal policy and increased debt issuance, rather than interest rate hikes. President Biden's public address on Oct, 20th once again requested Congress to approve an additional $105 billion special budget (Related to Isreali-Palestine War).

3. Increase in the fiscal deficit and Fiscal expansion have also led to an increase in the scale of debt issuance.

Whether it is growth or issuing more debt, it will drive interest rates higher. This is primarily a direct result of expansive fiscal policy rather than monetary policy.

On one hand, government credit expansion "supports" the private sector's risk, extending or offsetting the transmission of monetary tightening.

On the other hand, it increases fiscal revenue and expenditure pressure, leads to an increase in the scale of debt issuance, and further elevates interest payment pressure and interest rates.

Still Not Ceiling?

The downward trend of long-term government bonds may also be a major direction, but it is slower and more gradual than expected, and it requires the appearance of some catalysts and turning points to cooperate.

The debt ceiling's constraints on fiscal spending, the two-party game in an election year, and rising interest expenses could all potentially constrain the fiscal stimulus space in 2024. This implies that government-led broad credit expansion may face tightening pressure.

Also, 2024 is election year, during these years, especially when the presidency and control of the House of Representatives, which has more significant fiscal authority, are held by different parties, the likelihood of fiscal expansion is reduced, especially considering the divisions within the majority Republican Party in the House of Representatives at present.

The increase in bond supply and trading factors make it difficult to quickly reverse the current trend. From a technical perspective, the RSI level of the current 10-year US Treasury bond is close to the oversold range (close to 70). Speculative positions show that some short positions in the 10-year US Treasury bonds have already been profitably closed after a rapid rise in interest rates, and net short positions have decreased by 10.3% since the end of August.

However, short positions in 2-year US Treasury bonds are still at historic highs. The bond liquidity index's measurement of tightness is approaching the levels seen in the early stages of the 2020 pandemic.

$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ(.IXIC)$ $Invesco QQQ Trust-ETF(QQQ)$ $iShares 20+ Year Treasury Bond ETF(TLT)$ $iShares 0-3 Month Treasury Bond ETF(SGOV)$ $iShares Short Treasury Bond ETF(SHV)$ $Cboe Volatility Index(VIX)$