Recently, the yield of US Treasuries began to fall from the high. In the middle of the day on December 14, Beijing time, the yield of 10-year US treasury bond bonds fell below 4%.
Why has the US Treasury yield dropped significantly? What are the subsequent impacts? Experts say that the Federal Reserve may cut interest rates around mid year next year, and the 10-year US Treasury yield is expected to continue to weaken. Under the recovery of the US China interest rate spread and easing of external suppression, the pressure of capital outflow may ease, and the marginal repair of risk preference will provide support for the stability of the RMB exchange rate.
See the top and fall back
Recently, most US bond yields have fallen, with 10-year US bond yields falling below 4% for the first time since August. According to financial data from Yingwei, as of 14:30 Beijing time, the 10-year US Treasury yield was 3.96%, down 7 basis points from the previous trading day and over 100 basis points from the high of 5.02% this year. In addition, the yields of 2-year, 5-year, and 30-year US Treasury bonds were reported at 4.36%, 3.90%, and 4.14%, respectively, down 12 basis points, 10 basis points, and 4 basis points from the previous trading day.
Yingwei's financial situation
Zhang Jingjing, Chief Macro Analyst of China Merchants Securities, stated that the performance of 10-year US Treasury yields falling by over 100 basis points since October is not only related to the expectation of the Federal Reserve ending interest rate hikes and starting interest rate cuts next year, but also the result of a significant adjustment in oil prices from high levels, driving inflation expectations to weaken.
As US bond yields decline, the US dollar index is weakening. According to Wind data, as of 14:35 on the 14th, the US dollar index closed at 102.61, down 0.33%. As of the time of press release, the US dollar index has fallen by a cumulative 0.85% since December.
Wind
On the early morning of December 13th, the Federal Reserve's Monetary Policy Committee announced that the target range for the federal funds rate would remain unchanged from 5.25% to 5.50%, in line with market expectations. The interest rate chart released after the meeting shows that more than half of Federal Reserve officials expect to cut interest rates at least three times next year, and nearly 30% of officials expect to cut rates at least four times.
The onshore RMB exchange rate has rebounded significantly. According to Wind data, as of 14:35, the onshore RMB to USD exchange rate was at 7.1351 yuan, up 485 basis points from the previous closing price, and the highest intraday price was at 7.1265 yuan.
Wind
The inverted interest rate spread between China and the United States is slowing down
Looking ahead to the future trend of US bond yields, the Chief Economist of CITIC Securities clearly stated that during the December interest rate meeting, the Federal Reserve kept interest rates unchanged and maintained the target range of the federal funds rate at 5.25% -5.50% for the third consecutive time, which is in line with market expectations. In addition, the dot matrix chart shows that the expectation of interest rate cuts next year has increased, and Powell's overall statement is biased. "We believe that the Fed's interest rate hike is almost certain to come to an end, and the Fed may cut rates around the middle of next year. The 10-year US Treasury yield is expected to continue to weaken," Ming Ming said.
According to Zhang Jingjing's analysis, the upside down trend of US bond yields may reverse in 2024. "The benchmark interest rate has a greater impact on the yield of US Treasury bonds with a maturity of 2 years or less. As a result, during the interest rate hike phase, the yield of long - and short-term US Treasury bonds tends to converge or even hang upside down. However, during the interest rate cut phase, the difference in yield between long - and short-term US Treasury bonds often widens," she said.
In terms of its impact on domestic assets, Yang Qinqin, a strategy research analyst at Huaxin Securities, stated that recently, the top of US bond yields has been confirmed, and the bottom of the RMB exchange rate has been consolidated. Looking ahead to 2024, with the decline in overseas US bond yields and the easing of the inverted interest rate spread between China and the United States, the pressure on capital outflows will ease, and the marginal restoration of risk appetite will help A-shares rise.
Affected by the easing of the inverted interest rate spread between China and the United States, foreign investment is expected to increase its holdings of RMB bonds. Data shows that in recent times, the net purchases and holdings of bonds by overseas institutions have shown a significant monthly increase trend. Overseas institutions have purchased Chinese bonds net for 9 consecutive months. Since 2023, the cumulative net purchase volume has reached nearly 1 trillion yuan. In October, the net purchase volume of foreign capital has exceeded 200 billion yuan; Since the third quarter, the bond holdings of overseas institutions have maintained rapid growth, with an increase of nearly 40 billion yuan in October and an expected increase of 250 billion yuan in November.
In terms of the RMB exchange rate, Zhang Ming, Director of the Institute of Finance at the Chinese Academy of Social Sciences, stated that from external factors, it is highly likely that the current monetary tightening cycle of the Federal Reserve will come to an end. Next year, both the US long-term interest rate and the US dollar index may moderately decline under the premise of two-way fluctuations, and the external environment facing the RMB exchange rate will improve; In terms of internal factors, China's economic growth expectations are gradually improving, and there may be a significant improvement in financial accounts. The exchange rate of the RMB against the US dollar will remain stable and rise in 2024.
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