The US Treasury surprised investors last week. The question now is how long this optimism can last.
The stock market and bond market both rose last week, because the increase in the auction size of long-term treasury bond bonds of the US Treasury Department was smaller than many expected.
At the end of last week, the yield of benchmark 10-year US treasury bond bonds fell all the way back to 4.557%. The yield once rose above 5% on October 23, which is the source of recent market anxiety. The S&P 500 index climbed 5.9% last week, mainly due to the relief brought by the decline in treasury bond bond yields. US treasury bond bond yield is a key driver of US borrowing costs.
Weak economic data and the implication that the Federal Reserve may not raise interest rates again this year are also the reasons for the decline in US treasury bond bond yields. But many people believe that the Treasury's actions are the key catalyst. The trend of bond prices and yields is opposite.
Until last week, people had been discussing the reasons for the soaring treasury bond bond yields in recent months. Some analysts believe that the main reason is strong economic performance and expectations for the Federal Reserve to raise short-term interest rates.
Others emphasized what they believed was the imbalance between supply and demand of US treasury bond, which was exacerbated by the recent increase in long-term treasury bond auctions to make up for the expanding federal budget deficit.
Regardless of the answer, investors have seized on an often overlooked event, namely the quarterly meeting of the Ministry of Finance to announce future borrowing plans, as an important moment in the market.
As a result, the Ministry of Finance not only announced last Wednesday that the auction growth of longer-term treasury bond was lower than expected, but also hinted that it intended to exceed the informal guidelines on how many short-term treasury bond to issue.
From the perspective of the dollar amount alone, the gap between Wall Street's expectations and the situation announced by the Treasury Department is very small. But investors welcome the potential information they read.
Normally, the Ministry of Finance is committed to "regular and predictable" auctions, with every subtle change in borrowing strategy being announced in advance. John Madziyire, head of the U.S. Treasury treasury bond Department at Vanguard, said that now the Treasury Department has sent a signal that it is willing to give up this "truth" and is "more sensitive to the market".
Further boosting the market, the Federal Reserve issued a similar message later on the same day. At the end of the two-day policy meeting, the Federal Reserve, as widely expected, maintained short-term interest rates unchanged. But in a policy statement, the Federal Reserve proposed a new approach to tightening financial conditions, which was a minor adjustment compared to its September statement, and investors interpreted it as recognition of the rise in bond yields.
Brian Jacobsen, Chief Economist of Annex Wealth Management, said that this is a wonderful coincidence. He said that first the US Treasury announced its borrowing plan, and then the Federal Reserve hinted that we were in a mode of keeping interest rates unchanged, which just sparked market enthusiasm.
The entire Wall Street was clearly relieved. The S&P 500 index has achieved its largest weekly gain in nearly a year, after just undergoing a correction, falling more than 10% from its peak in July. Sectors such as real estate and information technology, which are particularly sensitive to rising bond yields, saw the highest gains. The S&P 500 index is holding onto a 14% intra-year gain.
Nevertheless, investors strongly remind that the favorable measures taken by the US government will not be enough to sustain this upward trend. Firstly, the company's performance needs to be strong, with Walt Disney and residential builder D R. Horton and other companies will release financial reports.
Analysts point out that neither the US Treasury nor the Federal Reserve have promised to protect investors from losses. Both the Treasury and the Federal Reserve are pursuing their respective goals, with the former seeking to minimize financing costs while the latter seeks to reduce inflation while avoiding economic recession.
Under the same other conditions, a decrease in yield should promote economic growth by lowering interest rates on housing mortgages and corporate debt. However, it is still unknown what kind of perfect interest rate level can effectively curb spending and control inflation without damaging the economy.
Investors were generally satisfied with last week's economic data, which was mostly weaker than expected, thus helping to drive down yields. Recent data shows that the economic growth rate in the third quarter reached a staggering 4.9%, and investors have been hoping for a slowdown in economic growth, partly to prevent further increases in yields and partly to prevent inflation from accelerating again.
However, this is a very delicate balance, with some investors expressing unease about last Friday's employment report. The data shows that the unemployment rate has unexpectedly increased, and the range of industries that increase wages is also shrinking.
Many investors are concerned that it is only a matter of time before high interest rates ultimately cause a drag on the economy.
On the other hand, the inflation rate is still higher than the Federal Reserve's target of 2%, and even after the summer cooling, there have been signs of a rebound recently. Some investors are concerned about the economic recession, while others are concerned that the Federal Reserve's inflation target will still be difficult to achieve, especially after last week's sharp rise in bond prices caused borrowing costs to fall again.
I think the gains we've seen in the past few days may have gone too far, "said Sonal Desai, Chief Investment Officer of Franklin Templeton Fixed Income
She added that there is a view that 'the US Treasury is the backbone of the market, but it cannot do it'. The scale of the budget deficit means that what the Ministry of Finance can do is absolutely limited