A roaring US debt storm is sweeping the world.
On the early morning of October 20th Beijing time, the 10-year US Treasury yield, known as the "anchor of global asset pricing," skyrocketed again, breaking through 5% during the session, reaching a new high since 2007. Although it has since fallen, it remains at its highest level in nearly 16 years.
The global stock market subsequently became jittery, with all three major US stock indices falling on Friday, with the Nasdaq index, mainly focused on technology growth stocks, plummeting by 1.53%. Other overseas markets and domestic Chinese stock markets were also affected, with the Irish Composite Index and German DAX Index plummeting by 2.58% and 1.64%, respectively. The Hang Seng Technology Index fell by 1.03%, and the Shanghai Composite Index also fell below the 3000 point mark on October 20th.
In the view of the interviewed fund managers, economic growth, inflation expectations, and supply and demand driven transaction pricing are the core driving forces for the upward trend of US bond yields. From the current conditions, high interest rates may be maintained for a long time, and risk assets in emerging markets, including currencies, will be the first to bear the brunt. Investors can pay attention to safe haven assets such as gold and short-term bonds.
Multiple factors driving the accelerated surge in US bond yields
For a long time, this year's upward trend in US bond yields began in late March. The yield of 10-year US bonds once rose to 5.004% from the lowest point of 3.253% in the year, breaking the 5% mark. The yield of 20-year and 30-year treasury bond also hit new highs, once rising to 5.363% and 5.146%, and US bond yields soared across the board.
Fu Beijia, fund manager of HSBC Jinxin Shanghai Hong Kong Shenzhen Fund and Hong Kong Stock Connect Dual Core Fund, believes that the core driving force of US Treasury bonds is economic growth, inflation expectations, and supply-demand driven transaction pricing. Since the beginning of this year, the US bond yield has risen beyond expectations, which can be divided into two stages:
The first stage is from March to July, driven by the US fiscal stimulus exceeding expectations, leading to an increase in central economic growth expectations and an increase in real interest rates. At the same time, service inflation and energy inflation have successively exceeded expectations;
The second stage is that since August, the supply and demand gap caused by the issuance of US bonds and the downgrade of US bond ratings by Fitch has widened, which requires higher risk compensation for US bond interest rates and accelerates the rise of interest rates.
Especially since September, the combination of strong economic data and employment data has increased the expectation of further interest rate hikes by the Federal Reserve at the end of the year. The 10-year US Treasury yield has experienced an accelerated surge, with the slope becoming steeper. In less than two months, it has risen from around 4% to 5%.
Di Xinghua, manager of Guofu Global Technology Interconnection Fund, believes that there are two main reasons for the recent acceleration of US bond yields:
On the one hand, the resilience of the US economy supports relatively higher real rates. Macro figures since September show that inflation in the United States has slowed but remains sticky, and the labor market remains strong. Stronger economic growth means relatively higher real interest rates. The length and intensity of monetary policy tightening may exceed the expectations of the vast majority of investors, so long-term interest rates continue to rise.
On the other hand, at the trading level, as the market generally does not believe that US interest rates can remain high, once US bonds break through the key psychological point of most investors and lose their anchor, they are prone to forming a unilateral trend in the short term.
But some fund managers also believe that although the crazy performance of US bonds is not unrelated to macroeconomic data constantly exceeding expectations, the greater reason may come from the imbalance between supply and demand of US bonds. In the past few months, the US Treasury has been solving a huge deficit by issuing a large number of bonds, but the three major buyers of US bonds, the Federal Reserve, Bank of America, and foreign investors, have been reducing their holdings. The selling pressure has intensified the sharp rise in interest rates and may even trigger a liquidity crisis, "said a fund manager.
Global stock market jitters
As the "anchor of global asset pricing," the significant increase in US bond yields is causing a huge impact on global financial markets. On the one hand, holders of US Treasuries will suffer significant losses due to the decline in bond prices, while on the other hand, higher bond yields will also continue to reduce the attractiveness of the stock market.
Ma Qiushi, a manager of Guofu's US dollar bond fund, believes that due to the continuous rise in US bond interest rates and the continued return of funds to the United States, risk assets in emerging markets, including currencies, will be the first to bear the brunt. For the sector, industries with heavy fixed assets and heavy debt are mainly affected by high interest rates. It is recommended that investors avoid them as much as possible.
Fu Beijia pointed out that typical varieties of negative correlation between US bond interest rates are non-ferrous metals, long-term assets (bonds, consumer stocks), and loss making growth stocks. The pressure on non US dollar currency depreciation is also increasing, and RMB assets may come under pressure against the backdrop of higher US bond interest rates. In the equity market, Hong Kong stocks are priced more at US bond rates and may also be affected. However, when the market expects US bond rates to be short-term trading highs, their reflexivity will also increase. Once a turning point is reached, Hong Kong stocks may also have a higher elasticity
The continuous rise of US bonds will also have a significant impact on the domestic equity market, especially due to the high proportion of overseas investors in the Hong Kong stock market. The continuous rise of US bonds may trigger a certain degree of liquidity risk. In the bond market, due to the continuous expansion of the interest rate gap between China and the United States, the central bank may tighten domestic liquidity in order to maintain exchange rate stability, and the cost of funds may rise, which will also have an impact on the bond market and drive up yields Regarding the impact of higher US bond yields on domestic stock and bond markets, fund managers have added.
Pay attention to safe haven assets such as gold and short-term bonds
There is a huge divergence in the market regarding when the Federal Reserve will raise interest rates and when US bond rates will reach a turning point. Some people believe that the United States will shift towards fiscal contraction next year, with a more than expected recession in the economy and a significant decline in US bond rates. However, others believe that the US inflation rate remains above 3% and the Federal Reserve will not significantly lower interest rates in the short term.
We believe that overall, the interest rate hike cycle is likely to end, but interest rates may remain high and volatile for a longer period of time, "Fu Beijia pointed out, After long-term interest rates exceed expectations and rise, the suppression of demand and investment intensifies, coupled with the likely weakening of US fiscal stimulus. The current interest rate level has deviated to a certain extent from economic fundamentals, so we believe that there is no need for additional interest rate hikes. However, due to the high energy prices and the reshaping of the manufacturing supply chain, it is difficult to return to the 2% target, so we tend to expect interest rates to fluctuate high for a long time
How should investors find safe havens for their funds in the face of the roaring US debt storm? How do fund managers adjust their positions to avoid risks?
"In the short term, we can consider the combination of gold and short-term debt, and in the long term, we can consider companies with rich cash flow and strong balance sheets. The logic is to expand under adverse economic conditions." Di Xinghua said, In terms of equity assets, although I don't think a 10-year interest rate of 5% on US Treasury bonds will be the norm, we still tend to focus on stocks with large market capitalization this year. I believe that the ability of the balance sheet and cash flow is highly likely to withstand this risk event. If repurchases and dividends can approach 4% -5%, while the main business remains stable, the probability of such companies will not be greatly affected
From a historical perspective, there has been a highly negative correlation between gold and US bond yields, but due to recent geopolitical risks, safe haven demand has supported gold prices. On October 20th, the most active December gold futures market on the New York Mercantile Exchange rose 0.7% to close at $1994.40 per ounce, marking the highest closing price since July 31st.
Fu Beijia also suggests that investors should pay attention to the investment opportunities of gold. She believes that with the rise of US bond interest rates, the trading attribute pricing weight of gold has increased, while the financial attribute pricing weight has decreased. From the current stage, it is still a good safe haven asset. My overall investment style will be more on the left, so based on the expectation of US Treasury bonds rising and falling, I will pay attention to investment opportunities in negative related US bond interest rates, such as non-ferrous metals and innovative drugs, in advance, "Fu Beijia said.
The market generally believes that a 10 year US bond interest rate of 5% is unlikely to be the norm. In the expectation that US bonds will rise and fall, some institutions suggest paying attention to investment opportunities in US bonds.
Morgan Stanley recently said that if the yield of 10-year US treasury bond bonds reaches 5% or higher, it is a good buying point for investors. The bank said that if the yield exceeded 5%, which was far away from the fair value of the treasury bond bonds that the company believed, "we will be in the overshoot category".
Ma Qiusi also said: "We believe that the 5% yield on US bonds is very attractive. Due to the high coupon rate, the probability of buying 10-year US treasury bond at present is low. However, if the hold to maturity strategy is adopted, the average annual yield of 5% in the next decade will be locked. For investors with less long investment periods, the current one-year yield on US bonds is 5.5%, which is also attractive."
At present, the inflection point of US bond interest rates is dominated by supply and demand, and the timing is difficult to determine. The occurrence of risks is often accompanied by accidental triggering of events. Once the 'Pandora's Box' is opened, the speed of interest rate decline may be faster and steeper than the upward period, "said Fu Beijia.