In recent months, due to the increasing expectations of the Federal Reserve's "long-term high for long interest rates", the 10-year US Treasury yield has broken several levels in a short period of time. Last Thursday (October 19) and Monday (October 23) were two important psychological levels that broke 5%, continuing to reach new highs since the global financial crisis in 2007.
As the anchor of global asset pricing, the rise in 10-year US Treasury yields over the past period of time has had a broad and far-reaching impact on global markets, from individual loan rates for US consumers to some emerging market currencies, all of which have been severely impacted. Some Wall Street strategists have bluntly stated that the surge in long-term US Treasury yields will have an impact on everyone.
Jonathan Gray, Blackstone's CEO, bluntly stated that the sudden and rapid growth in 10-year US Treasury yields has shaken people's confidence in the continued resilience of the US economy, potentially "derailing US economic expansion from its current trajectory. In fact, the 10-year US Treasury yield exceeding 5% has actually led to a tightening of the US financial environment. FOMC's 2024 vote committee and San Francisco Fed Chairman Daley pointed out last week that she believes the recent tightening of the bond market is roughly equivalent to a rate hike. At present, the "Federal Reserve Observation" by the Chishang Exchange also shows that the market no longer has expectations of another rate hike by the Federal Reserve in November, and it is almost certain that interest rates will remain unchanged next month.
Looking ahead to the future, Huang Lichong, President of Huisheng International Capital, pointed out in an interview with the Daily Economic News that US bond yields will continue to rise due to the presence of excess funds in the market and the stickiness of US inflation.
Consumer borrowing costs have risen to their highest level since 2007, and futures markets are betting on no interest rate hikes in November
Strategists attribute the recent surge in US bond yields to several factors: market concerns that the Federal Reserve will continue to push up benchmark interest rates to combat inflation, sustained better than expected economic and labor market performance, US government deficit inflation, and an increase in so-called term premiums (i.e. additional yields demanded by investors who are concerned that interest rates may change within the term of their holdings).
The 10-year US Treasury yield once broke the 5% mark
The Federal Reserve controls short-term interest rates, which affect the economy through market rates such as US bond yields and affect the borrowing costs of long-term debt, including credit card rates and corporate bonds. However, unlike the gradual rate hikes by the Federal Reserve, changes in long-term market interest rates (such as the 10-year Treasury yield) are less predictable and are influenced by many factors. These changes in long-term US bond yields are crucial to the US economy as they significantly alter the behavior of consumers and companies in the face of suddenly rising borrowing costs.
For example, with the rapid rise in long-term US bond yields, the average interest rate on 30-year US mortgages broke 8% last week, reaching a new high since mid-2000. Such high mortgage interest rates have lowered the demand for mortgage loans in the United States to the lowest level since 1995 for the week ending October 13th.
The Daily Economic News reporter also noticed that not only mortgage rates, but also credit card rates in the United States have exceeded 20%. According to data from the Federal Reserve, the two-year personal loan interest rate of American commercial banks reached 12% in August, the highest borrowing cost since 2007.
The high borrowing costs are undoubtedly bad news for American consumers: in the past 18 months, although the Federal Reserve has been raising interest rates, consumer spending has been the backbone of the US economy. However, with the soaring borrowing costs, the consumer spending frenzy may soon come to an abrupt end.
Jonathan Gray, CEO of BlackStone, a top private equity investment and investment management company in the United States, recently stated that American consumers are about to feel the "sting" of soaring US bond yields. When the 30-year mortgage interest rate reaches 8%, consumer behavior will be affected. The resilience of US economic growth has always been strong, but if the Federal Reserve tightens its policies and maintains high interest rates for such a long time, it will invisibly lead to an economic slowdown
The Daily Economic News reporter also noticed that the recent rapid rise in US bond yields has attracted the attention of the Federal Reserve, and the certainty of suspending interest rate hikes in November is gradually increasing.
Federal Reserve Chairman Powell also mentioned in his recent speech the rapid rise in market interest rates and their potential impact on the economy, including whether the Federal Reserve will raise interest rates again or "stay put". In a speech on Thursday, he said, "The task of balancing the risks of excessive and insufficient monetary policy tightening has become more complex for us due to a series of new and old uncertainties
In addition to Powell, several Federal Reserve officials have also stated that the significant increase in US bond yields has objectively tightened financial conditions, and the Federal Reserve should be more cautious about future interest rate hikes.
Jonathan Millar, a senior American economist at Barclays, agrees with this, stating in an email to reporters at the Daily Economic News that, We believe that the rise in 10-year US Treasury yields has led to a tightening of the financial environment, including rising interest rates on corporate bonds and mortgages. This means that evidence of a resurgence in economic activity in the third quarter and signs of more stubborn inflationary pressures than expected indicate that the tightening intensity in November will exceed market expectations. Although we currently maintain our expectations for another rate hike by the FOMC in November, the ultimate result may be a pause Raising interest rates because the steeper yield curve has bought time for further evaluation of economic data
After the 10-year US Treasury yield broke 5%, the futures market's expectations for the Federal Reserve's short-term policy also completely changed. According to the "Federal Reserve Observation" by Chishang Exchange, as of press release, futures traders believe that the probability of the Federal Reserve maintaining interest rates unchanged in November is as high as 98.4%, and the remaining 1.6% is likely to be a rate cut, with no expectation of further rate hikes.
Significant withdrawal of funds from stock base
Against the backdrop of significantly higher long-term US bond yields, funds are also frantically withdrawing.
According to Reuters, global equity funds recorded their fifth consecutive week of net outflows in the seven days ended October 18th, influenced by the continuous rise in US bond yields and the escalating situation in the Middle East. Specifically, equity funds in the United States and Europe posted net outflows of $4.57 billion and $4.12 billion respectively last week.
Looking at different industries, industry based stock funds posted a net outflow of $2.05 billion last week, marking the sixth consecutive week of net outflows. Among them, the utilities, technology, and healthcare industries led the way, with net outflows of $920 million, $803 million, and $762 million, respectively.
Meanwhile, after two consecutive weeks of net inflows, global money market funds experienced a huge net outflow of $97.51 billion last week. According to data from commodity funds, global investors withdrew $1.02 million from precious metal funds last week, marking the 21st consecutive week of net outflows. The sustained net outflow of global high-yield bond bases was $2.73 billion, marking the sixth consecutive week of net outflow.
The New York Times also reported that the soaring yield of 10-year US Treasury bonds will also lead to higher yields of treasury bond around the world. For example, the benchmark 10-year German treasury bond recently approached the 3% threshold, a new high since the "European debt crisis" in 2011. Emerging market economies have to face the dual impact of rising yields and a stronger US dollar.
Huang Lichong, President of Huisheng International Capital, analyzed and pointed out in an interview with a reporter from Daily Economic News that, The yield of 10-year US Treasury bonds is a barometer of global interest rates, so when this yield rises to 5%, it means that the global borrowing costs have increased, which will directly affect all currencies around the world. When the yield of US Treasury bonds rises, it can also be seen that in some high-risk markets, as well as some overvalued stocks in the past, they have started to decline. In addition, there is also an increase in currency volatility in many countries Economic policies have also been affected as a result. On the whole, the rise in US bond yields is detrimental to treasury bond, especially to countries with heavy debts. "
From the performance of emerging markets, the negative impact of higher US bond yields is also emerging. In terms of emerging market funds, data covering 28669 funds shows that emerging market equity funds experienced a net outflow of $2.41 billion last week, marking the 10th consecutive week of net outflows. In addition, $657 million of funds were withdrawn from the emerging market bond base.
Looking ahead, Huang Lichong believes that US bond yields will continue to rise. When it comes to the reasons, he added to every reporter, "Firstly, there is still an excess of funds in the market because the Federal Reserve has released too much water in the past few years, and now it has confiscated too much. Secondly, there is geopolitical and sticky inflation, and the stickiness of inflation will force the yield of US bonds to rise