At a time when the political drama in the United States continues, a serious crisis is quietly occurring in the US financial market. In just over two weeks, the yield on the 10-year Treasury note has climbed more than 50 basis points (a rise in yields means a fall in bond prices).
The data shows that since its peak in March 2020, the price of US Treasuries with a maturity of more than 10 years has fallen by 46%. This decline is not at all "inferior" to the 2008 financial crisis and the bursting of the Nasdaq bubble in 2000.
Data illustrated according to ICphoto
Senior Fed official Goulsby said he recently pondered "who is dumping U.S. Treasuries" and reminded investors to "don't go against the Fed," but he also understood the investment logic of selling U.S. bonds.
Yardney, a former economic adviser to the Federal Reserve, believes that U.S. bond holders are equivalent to the "vigilantes" of the U.S. economy, they are the people who are most concerned about the health of the U.S. economy, and their sell-off shows that investors are not optimistic about the long-term recovery trend of the U.S. economy.
Senior Fed Officials:
"Working against us" does not end well
Chicago Fed President Austin Goulsby served as an economic adviser in the Obama administration and was a strong candidate to compete for the "second-in-command" position within the Fed. The heavyweight official reminded investors on the 5th that "don't go against the Fed."
Goulsby said he understands the investment logic of U.S. Treasury holders, but he doesn't think the market should have seen such violent sentiment swings over the past three weeks that it ignores fundamental information. The Fed's quarterly summary of economic forecasts released after the September meeting was slightly different from the previous version, sparking speculation among investors, but Goulsby said investors needed to think about "is the wording of the new version really so different from the past that the fundamentals of the U.S. economy have changed substantially in just two or three weeks?" “
He added, "I think what people need to figure out is, why has there been such a big drop in the last three weeks? If you stretch it up to a six-month time dimension, I don't think that's a major turning point in the last three weeks. It is clear that the rise in long-term interest rates is what the market had expected. ”
Chicago Fed President Austin Goulsby
Goulsby said he strongly supports the Fed's policy target of pushing inflation to 2 percent, citing the example of Silicon Valley Bank that "going against the Fed" usually doesn't end well. "Silicon Valley Bank knows it has a lot of bonds, so it needs to hedge its risk. Although it hedged against raising rates, they later decided that the Fed would not stick to raising rates to the end, so they felt that they would make more money if they canceled the hedging strategy. They finally decided to cancel the hedge, and everyone else knew what happened. It's not a good idea to remember the lessons of the Silicon Valley bank failure and not go against the Fed. ”
U.S. Treasury Debt Plunges:
"Global asset pricing anchor" loosened?
In global financial textbooks, U.S. Treasuries are generally considered standard "risk-free assets", and the price of U.S. bonds is also used by Wall Street analysts as a "pricing anchor" for global securities assets. Simply put, the value of securities such as stocks is determined by reference to the yield on U.S. Treasury notes.
And recently, the collapse in the price of US Treasuries has also disturbed the global stock and bond markets.
On October 3, local time, the "number of job vacancies" indicator released by the US Department of Labor rose unexpectedly, triggering market speculation that the Fed would continue to raise interest rates, causing the US 10-year Treasury bond yield to soar to 4.88%, creating a new high since 2007. The fall of U.S. bonds back to financial crisis-era levels also sent global asset prices plummeting.
On October 4, the South Korean stock market, which is closely linked to the US economy, closed down nearly 2.5%, with a cumulative decline of more than 7% in the past half month; In Japan, where interest rates remain ultra-low, the yield on 10-year government bonds has rarely broken the 1% mark; Germany's usually solid 10-year yields climbed to 3 percent, returning to their highs during the 2011 European debt crisis. Even Australia, which is "far away", has suffered a "double kill of stocks and bonds", and the collapse rate of Australia's 10-year government bonds once exceeded that of US bonds.
Statistics show that the correlation between the "Bloomberg Global Securities Asset Benchmark Index" (excluding the US market) and the US Treasury yield index has reached the highest level since the outbreak of the new crown epidemic, fully reflecting the "lethality" of the 10-year US Treasury yield to global asset prices.
Economist:
The US economy is sluggish, which has led to the "vigilantes" taking action
Former New York Fed economist Ed Yardney said that since the epidemic, the consequences of the ultra-large-scale fiscal stimulus carried out by the US overdraft have gradually appeared, and the large-scale selling of US long-term bonds shows that people are increasingly wary of what US fiscal policymakers are doing.
Yardney wrote in a research report released on the 3rd, "The concern is that the ballooning federal budget deficit will cause bond supply to exceed demand, which will require higher yields to drive the market clear." This is the warning signal of the appearance of the 'bond market vigilante'."
The term "bond market vigilante" was first coined by Yardney in 1980 to refer to bond market investors who are highly sensitive to interest rates and fiscal policy, often play the role of "overseeing" economic policymaking, and sell bonds in an environment they consider risky. These "vigilantes" will significantly lower the price of U.S. bonds, which can objectively alert the market to the risks facing the U.S. economy.
Judging from the actual results, the actions of these "bond market vigilantes" have indeed attracted great attention from the US economic circles.
Timi Laws, a financial reporter for the Wall Street Journal known as the "mouthpiece of the Federal Reserve", wrote that the sudden sharp sell-off of US Treasury bonds by the market, the consequences of which are destroying the hope of a soft landing of the US economy, and the surge in borrowing costs may significantly slow down economic growth and increase the risk of financial market collapse.
Mary Dalí, the current president of the San Francisco Fed, called on the Fed to pay attention to the signals sent by the market when speaking at the New York Bankers Club on the 5th. Dalí said, "We don't need to rush to raise interest rates anymore, the market has full expectations for this, what we need now is stable, peaceful steps."
Red Star News reporter Zheng Zhi
Edited by He Xianxian, Editor-in-charge by Feng Lingling
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