On Tuesday (October 24), the yield of benchmark U.S. 10-year treasury bond fell slightly, further away from the 5% threshold hit at the beginning of this week, because many investors are still worried about the negative impact of the sharp rise in borrowing costs on the economy, and the geopolitical situation between Palestine and Israel continues to be tense, making many bond market bulls choose to buy after selling recently.
Market data shows that the overall overnight rise and fall of US Treasuries across different maturities varied, with short-term bond prices continuing to be under pressure, while long-term bonds gained buying support. As of the end of the New York session, the two-year US Treasury yield rose 5.8 basis points to 5.118%, the five-year US Treasury yield rose 2.4 basis points to 4.826%, the 10-year US Treasury yield fell 2.2 basis points to 4.827%, and the 30-year US Treasury yield fell 5.9 basis points to 4.942%.
At present, after the 10-year US Treasury yield briefly rose above the 5% mark and quickly regained its gains and losses, the 30-year US Treasury yield has also fallen below the 5% mark, reflecting this key integer mark, which is attracting many bond market bulls who hope to buy on dips to return. Many pension funds and other US treasury bond bond investors are also seeking to increase the duration of their portfolios after selling this month.
Tom di Galoma, BTIG's managing director in New York and co head of global interest rate trading, said, "As the US treasury bond bonds were sold off in the past month, you can begin to see bond buyers re emerging. At the end of the month, there is often a demand for duration."
However, the short end of the US debt curve was still further sold off overnight and pushed the overall yield of US two-year to seven-year treasury bond bonds higher, partly because the data showed that the US service industry and manufacturing activities were stronger than expected. This increases people's expectations that the Federal Reserve will maintain high interest rates for a period of time.
As shown in the figure below, the yield of two-year and 30-year treasury bond returned to the upside down state on Tuesday after the temporary end of the upside down in the previous two trading days.
What happened the last time US bond yields soared like this?
Although the upcoming US GDP data for the third quarter on Thursday is likely to show a doubling of the US economic growth rate compared to the previous quarter, many market participants are still concerned that soaring interest rates may have an impact on the US economy in the future. It should be noted that the last time the US Treasury yield rose so rapidly to such a high level, the US economy fell into two consecutive recessions in just a few years.
The yield of the 10-year treasury bond bond, the key benchmark for measuring the cost of capital in the entire financial system, has jumped more than 4 percentage points in the past three years, which is the largest increase since the yield soared in the early 1980s. At that time, Federal Reserve Chairman Volcker was working hard to curb inflation, pushing the 10-year Treasury yield up to nearly 16%.
In a sense, these similarities are not surprising, as the current Federal Reserve Chairman Powell's rate hikes over the past year are also the most radical since that period.
As shown in the figure below, in the late 1970s and early 1980s, high inflation and the impact of the Federal Reserve's monetary policy caused the US economy to experience two rounds of recession, one short and the other long.
This seems to indicate whether the resilience presented by the US economy can be sustained, and it remains to be seen.
Billionaire investor Bill Ackermann ended his bearish bets on long-term bonds on Monday and stated that the economy is rapidly slowing down. Gross, the "old debt king," also supported Ackerman's turning point of view. Gross echoed Ackerman's warning that the turmoil in regional banks and the rise in default rates on car loans indicate a "significant slowdown" in the economy.
Of course, a key difference from the 1980s is that the policies of the Volcker era still need to be more restrictive. According to the data compiled by the media, before the start of the second recession in mid 1981, the actual 10-year US treasury bond bond yield adjusted for inflation was about 4%. Now the yield is only about 1%.
This may also indicate that while historical experiences have similarities, there is still room for improvement in the future direction.
Of course, if the US Treasury yield wants to further rise, it may not be as smooth as in the past few months. UBS strategists wrote this week that higher interest rates "will exert downward pressure on economic growth and inflation over our tactical period of six to twelve months. Slowing growth and inflation should in turn lead to a decline in yields. From the current perspective, our view is that we are now close to peak yields. The institution has also reiterated their preference for high-quality bonds with a maturity of 1-10 years.