"Blood does not stop", and this round of negative yield cycle of global bonds is coming to an end

Recently, there is a more unusual signal, starting from last Friday, the selling boom in the treasury market has descended on many economies around the world, and short-, medium- and long-term bond yields have risen across the board.

First of all, look at the US 10-year Treasury yield, which is regarded as a very important needle in the global financial market, and has continued to rise since July 2020. Judging from the current trend, the probability will break through 2%, which will have a profound impact on the subsequent pricing of risk assets.

On the news side, the United States will release January CPI data on Thursday, and the market is worried that inflation may exceed expectations, causing the Fed to be more hawkish and then raise interest rates more than expected, resulting in higher US Treasury yields.

It is followed by Japan and Germany, two major negative-yielding bond countries, which have turned positive for the first time in several years since Last Friday. Among them, the yield on Japan's 10-year government bond climbed to 0.206% at one point, setting a new record since the beginning of 2016.

In addition, in Australia, the government bond market has also been hit hard, with the 10-year yield soaring to 2.13%, the highest since March 2020.

Across Europe, where negative-yielding bonds have fallen by 80 percent since peaking in December 2020 to a total of $1.9 trillion.

At the same time, the world's large number of negative-yielding bonds has shrunk sharply to $4.9 trillion, the lowest level since December 2015.

If the expectations of the normalization of monetary policies in various countries come true, the cycle of negative yields on bonds may really be gone.

01

The Fed boasts about itself

The us 10-year Treasury yield is actually equivalent to the cost of funds in the US dollar.

And one-fifth of the total amount of U.S. dollar bills in the past hundred years has been printed in the last two years. Against this backdrop, Treasury yields should fall, and it's strange to see that it's up so much now.

U.S. Monetary Aggregates, Source: Chuancai Securities

The Fed has claimed that this is because the market is confident in the recovery of the US economy, so it has led to an increase in the yield of the 10-year Treasury note.

As the world's largest seller, this is obviously a bit of self-selling and boasting.

You know, at the worst time of the epidemic in beautiful countries, the yield on government bonds is rising, which can be said to be unable to fight between the confidence of economic recovery.

According to the historical law, the Fed cut interest rates, the ten-year Treasury yield fell; if the rate was raised, it would rise.

At the same time, this indicator also has a "first-mover" effect. For example, the Fed has not yet started raising interest rates, but the yield on the 10-year Treasury note continues to rise.

This has actually had a substantial effect of a disguised interest rate hike, reflecting the market's expectations for the Fed to exit quantitative easing.

But this expectation, which cannot be too high, has a psychological tipping point.

Citi's tipping point is set at 1.7 percent, while JPMorgan Chase believes the tipping point is at 2 percent. In general, international financial markets believe that the tipping point of the US 10-year Treasury yield is 1.5%.

Once this value is exceeded, it represents an increase in global inflation expectations. Although the US Treasury selling boom has eased slightly in the past two days, the current yield is still as high as 1.927%, which has exceeded the expectations of most institutions.

According to the latest data, the US CPI for January is expected to rise by 7.2% from the same period last year, the largest year-on-year increase since 1982.

Soaring inflation is the biggest reason for the rise in the yield on the 10-year Treasury note.

Monthly year-on-year increases in U.S. CPI and core CPI, Source: Wind

In this case, a large number of hedge funds around the world may short US Treasury futures according to strategic needs, at which time bond yields will accelerate.

And the higher the yield on the bond, the lower the bond price and the less valuable it is. At that time, the bubble valuation of the US stock market and the huge liquidity brought by the massive US dollar bill may be punctured.

At present, the forecasts of some wall street banks are very aggressive, and the expectations of the Fed and the European Central Bank to tighten monetary policy are getting stronger. Bank of America, for example, predicts that the Fed will raise interest rates seven times this year, 25 basis points each time, and four more next year.

In addition, strong employment data has forced the Fed to start acting.

On Friday, the U.S. released non-farm payrolls data, adding 467,000 new jobs in January, almost four times as many as expected, and the market was shaken, and speculation about the overheating of the US economy was also noisy.

The accelerated implementation of austerity policies is imminent.

U.S. Non-Farm Payrolls, Source: Wind

02

The ECB's eagle claws are sharp

Following raising the benchmark from 0.1% to 0.25% in December, the Bank of England again announced a rate hike to 0.5% on Thursday amid concerns about inflation.

Bank of England raises interest rates in a row, Source: Wind, Guojin Securities

The ECB has expressed the same concern.

Also on Thursday, ECB President Christine Lagarde acknowledged that there are upside risks to the inflation outlook and did not rule out the possibility of raising interest rates this year. A change from last month's insistence that there would be no interest rate hikes this year.

After the news broke, the market's expectations for a rate hike in Europe before the end of the year quickly increased from 12 basis points to 25 basis points.

Klaas Knot, a member of the ECB's Governing Council, claimed on Sunday that the ECB may end its stimulus program early, but is unlikely to raise interest rates in July as investors expected, perhaps as early as Q4 this year.

Previously, although there were also inflationary pressures in the euro area, the attitude has always been relatively "doves", and the release of the signal to turn eagles this time is undoubtedly a huge change.

Although last night, ECB officials again made dovish remarks, saying that the market may have over-expected interest rate hikes this year and overreacted to the hawkish turn of the central bank.

The European debt panic sell-off has indeed eased as a result.

But just like an arrow off the string, it is difficult to get it back when it is sent out.

Judging from the current price in the futures market, by the end of this year, the EU monetary policy rate will be close to 0, rather than the -0.5% level of the last two years.

In Italy, for example, the cost of borrowing for a two-year period has risen to 0.4 percent, far higher than the -0.2 percent in December.