Since the end of October, the interest rate of the 10Y US bond has fluctuated sharply, falling first and then rising
Since the end of October, the 10Y US bond interest rate has fluctuated significantly, first dropping from a high of nearly 5.0% to 4.49% on November 8th, and then suddenly turning around and rising to around 4.61% in recent days. We will analyze the driving factors behind the recent trend of US bond interest rates and provide a preliminary outlook for the future trend.
2. Fiscal refinancing, FOMC meetings, and lower than expected non farm data drive a significant decline in US bond rates
The lower than expected non farm data released in early November, as well as factors such as the structure of refinancing and bond issuance, drove the interest rate of the 10Y US Treasury bond down.
1) Refinancing: On November 1, the US Department of Finance announced the latest refinancing bond issuance structure, mainly adjusting the additional issuance structure of FY24 Q1 interest paying bonds to focus more on 2-7-year treasury bond rather than 10-30-year long-term treasury bond, which is lower than the market's previous expectation that the US Department of Finance will maintain the additional issuance structure of interest paying bonds discussed at the last refinancing meeting, which is reflected in the easing of supply pressure in the perspective of US debt supply and demand.
2) Non farm: On November 3rd, the US Bureau of Labor released non farm data that was lower than market expectations. Although the unemployment rate only rose by 0.1 percentage points, the market began to worry about the risk of a downturn in the job market.
3) FOMC: In addition, the November Federal Reserve FOMC meeting released very little new information and had little impact on asset prices. Most importantly, it conveyed to the market that a surge in term premiums may replace interest rate hikes, leading to a downward trend in market expectations for further interest rate hikes by the Federal Reserve.
3. Powell's release of hawks, insufficient demand for US bonds, and Moody's downgrade of US rating drive a rebound in US bond interest rates
But since November 8th, the 10Y US Treasury bond interest rate has suddenly rebounded to 4.61%, mainly influenced by the following three factors.
1) The auction of US bonds highlights the insufficient demand: on November 9, the auction of 30-year treasury bond bonds by the US Treasury Department won a bid interest rate (4.769%) that was far higher than the expected yield (4.716%), indicating insufficient demand for US bonds.
2) Powell "hawked" and said there was still a possibility of further interest rate hikes: On November 9th, Powell stated at the IMF event that if appropriate, the Federal Reserve would raise interest rates again. Although the wording remained unchanged from before, it still pushed the US Treasury bond interest rates to rebound.
3) Moody's downgrade of US rating outlook: On November 10th, Moody's downgraded the US credit rating from "stable" to "negative", mainly due to the risk of US fiscal deterioration. Moody's expects the US fiscal deficit to remain huge, weakening debt sustainability. This decision to downgrade the rating may be related to the possible "shutdown" of the US government on November 17th next week, and is also an inevitable consequence of the current "fiscal leniency and monetary tightening" economic policy adopted by the US.
4. Outlook: The "government shutdown" crisis may disrupt US bond interest rates in the short term, but the trend of US bond interest rates will still fall next year
In the short term, November 17th is the day when the US federal government runs out of funds. Next week, the market may become concerned about the US government's "shutdown" or cause some disturbance to the 10Y US bond interest rate. From a deeper perspective, the US government needs to repeatedly delay the closing time through temporary plans, which actually reflects the difficulty of both parties in reaching an agreement on the new fiscal year funding bill. This is also the fundamental reason why Moody's is concerned that the US government will find it difficult to effectively reduce the deficit.
From the perspective of next year, the US Treasury Department is expected to issue additional interest paying treasury bond until the first quarter of next year, which means that the supply side impact may not subside until the first quarter of next year. Thereafter, the pricing of US bond interest rates will gradually return to the traditional actual economic growth and inflation mode, and both will tend to decline in the next year, so that the overall US bond interest rate will decline next year, but there are also two major risks in the decline of US bond interest rates next year, One is the uncertainty in the timing of the normalization of the Bank of Japan's monetary policy, and the other is that US inflation may be hindered by a rebound in rent inflation in the fourth quarter of next year.