To The Moon

In this article 2 topics will be analysed they are:

A. Worries about soaring interest rates on US Treasuries

B. Flattening the yield curve of US debt

Under normal circumstances, interest rates on long-end bonds should be higher than those on short-end bonds, just like savings, long-term deposit rates are naturally higher than short-term ones, because the former has greater liquidity risk. But as expectations of Fed interest rate hikes rise, the yield curve flattens quickly. After the Fed raised interest rates, the 10-year and 5-year yields were inverted, and the 10-year and 2-year yields have narrowed to within 20BP.

Historically, the reversal of the US bond yield curve usually occurred in the second half of the Fed's rate hike or after the end of the rate hike cycle, but this time it occurred at the beginning of the rate hike.

CITIC bond team believes that the leading factor of short-term interest rates is the target interest rate of monetary policy, while the leading factor of long-term interest rates is the economic outlook. In the later stage of interest rate hikes, tight monetary policy and a poor economic outlook will push long-end interest rates down and short-end interest rates to continue to rise. Therefore, in the later stage of interest rate hike, the narrowing speed of long-term and short-term interest rate spreads increases, and the yield curve may be upside down.

The current round of Fed interest rate hike is relatively lagging behind, and the start of the interest rate hike is nearing the end of the recovery, so there is a phenomenon of the yield curve hanging upside down in the early stage of the rate hike.

Unlike previous economic cycles, the current yield curve is rapidly flattening and may be additionally affected by inflation expectations. For a long time in the past, there was little need to take inflation into account in US monetary policy, and there was less pricing for inflation in the yield curve, but in this economic cycle, US inflation is rising, which is bound to have an impact on interest rates over all periods.

Why is the market so concerned about the upside-down of interest rates on US Treasuries? Because from a historical point of view, the upside-down of interest rates on US debt tends to herald a recession in the US economy.

CITIC bond team summed up the historical experience that since 1966, after the US bond yield curve has been upside down, there is a high probability that there will be a recession in 6-24 months. Specifically, a more comprehensive upside-down of the yield curve will indicate an economic recession. at present, the spread between 10-year and 3-month interest rates is still high, and it is expected that the yield curve will be fully inverted in 2022. The possibility of a recession in the future is also low.

Guojin Securities believes that the divergence in interest rates between 10-year and 3-year US Treasuries and 10-year and 2-year US Treasuries, as an important economic indicator, seems to point to a huge divergence in the market's judgment of the future US economy. The spread between 10-year and 2-year Treasuries is nearly upside down and is seen by some markets as a harbinger of a US recession. But based on the Fed's economic forecasting model based on the spread between 10-year and three-month Treasuries, the US economy seems a long way from recession.

Guojin Securities further explained the reasons for the deviation of US debt spreads in different periods: the interference of the epidemic disrupted the economic and policy cycle of US policy, which showed that the process of monetary policy normalization seriously lagged behind economic normalization. The divergence of interest rate spreads of different maturities is essentially a difference in the response of interest rates on three-month and two-year Treasuries to expectations of interest rate hikes.

Because of the shorter maturity, the three-month bond interest rate is closer to the federal funds target rate than the two-year bond rate. Under the influence of the gravity of policy interest rates, the three-month Treasury interest rate will not digest the expected rate increase in advance like the two-year Treasury rate, but more in response to the pace of interest rate increase actually fulfilled by the Federal Reserve. As a result, the spread between 2-year and 3-month Treasuries tends to widen before and after the start of interest rate hikes, resulting in deviations in spreads for different maturities.

Guojin Securities also believes that this divergence in US bond spreads of different periods may be short-lived, and the market pricing is obviously underpriced as the Fed raises interest rates and shrinks the table and turns to simultaneous expansion. The Fed's actual contraction may exceed market expectations, which will lead to a steepening of the Treasury yield curve.

The global bond market plummeted! The two major risks are approaching the limit!

What is the reason for the collective uprising in the global bond market?

On March 31st, when the SLR expires, there is demand for big global banks to sell US Treasuries, and US bond yields are under upward pressure.

The market expects Biden to launch an unprecedented fiscal stimulus package.

Us President Joe Biden wants to approve a massive infrastructure package in the summer, expected to be between $3,000bn and $4,000bn, according to the Associated Press.

A White House official said on Monday night that it could end up approaching $3 trillion (nearly 20 trillion yuan). According to Biden's itinerary, he will unveil the framework of a large infrastructure and jobs plan in Pittsburgh on Wednesday, local time, and will present his 2022 budget for the first time later this week.

As we said earlier, the surge in the dollar and the surge in US bond yields will put pressure on global markets.

This is also an important logic for global markets in March.

Today, there is a phenomenon that although bond yields have soared, European stock markets have strengthened collectively, and the three major stock index futures in the United States are also quite strong.

The real market is a little different from the logic.

How to understand this deviation?

In fact, we have made it clear in the article "sudden decoupling of the two major markets":

1. From a dynamic point of view, the rise in US bond yields will indeed lead to a decline in risky assets such as the stock market, and this logic is still valid.

2. From a static point of view, US bond yields continue to rise and marginal stimulus continues to rise, which will lead to a decline in risky assets.

In other words, any factor that affects the market has the law of diminishing marginal effect.

Under the law of diminishing marginal effect, the stock market is less sensitive to the surge in US bond yields.

But the law that US debt affects the risk market still exists, but now the risk is accumulating, just waiting for an outbreak.

Near the time of publication, the futures of the three major US stock indexes all fell, indicating that the impact of US bond yields on the stock market still plays a role.

3. In the era of MMT, finance determines the direction of the market and the central bank determines the fluctuation of the market.

With expectations of Fed cuts in QE simmering, emerging markets have been forced to raise interest rates, and a new storm is on its way.

As soon as the Fed loosens and tightens, the global market will die for a lifetime, which is an unshakable rule under the hegemony of the dollar.

The last time the Fed dominated the inflection point was in 2014, when it triggered big swings in global financial markets, especially in some emerging countries, where exchange rates almost halved.

In 2014, the Fed just made a fuss, announcing taper and interest rate hikes, and several "fragile countries", such as Russia, Brazil and Argentina, had a "currency crisis", a victim of dollar hegemony.

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