U.S. Treasury Update

After the rebound of the $22 trillion US government bond market this summer caught most people on Wall Street by surprise, some investment banks lowered their expectations for US Treasury yields.

The 10-year U.S. Treasury bond yield-a key reference point for global assets-fell to 1.13% in early August because of debt prices Dramatic increase. Despite the strong economic recovery and signs that the U.S. Central Bank Getting closer End its stimulus plan during the crisis-a factor that usually leads to higher yields.

Analysts and investors are forced to reconsider earlier forecasts that the yield will exceed 2% by the end of the year. Although it has begun to rebound from recent lows, few people expect yields to reach the previously predicted levels. Goldman Sachs and JPMorgan Chase, two major players in the US debt market, lowered their expectations this month.

This trajectory is not only important for investors in the world’s largest fixed-income market: it may also be crucial to the future of the blue-chip S&P 500 index reaching a record high stock market rally.

According to the average analyst forecast prepared by FactSet last month, before the recent revision, the 10-year Treasury bond yield is now expected to rise from the current 1.31% to 1.8% by the end of the year. This average has fallen from 2% in May.

JPMorgan Chase lowered its 10-year end-of-year forecast from 1.95% to 1.75% last Friday, believing that the Fed’s apparent willingness to tighten monetary policy should curb inflation expectations.

The New York bank said that inflation is a curse for bond investors because it erodes the income stream provided by assets, so future weaker price growth should help ease the long-term pressure on US Treasuries. As the market rose, Bank of America, Commerzbank and ING also lowered their forecasts.

When updating their forecasts, some analysts and investors questioned whether the expected increase in yields, even if they were not as severe as initially expected, would undermine the progress of the stock market.

Stocks are usually sensitive to bond yield levels, and lower yields make the potential returns of holding stocks more attractive. Seema Shah, chief strategist at Principal Global Investors, said that a rapid recovery to 2%—some analysts still expect 10-year Treasury yields to reach this level before the end of the year—may make stock investors uneasy.

“For risky assets, what matters is not the level of return, but the speed at which they rise,” she said. “An increase of 0.7 to 0.8 percentage points in just a few months may destroy the stock market.”

When analysts revise their assessment of bond yield trends, they are paying attention to this interaction with the stock market.Goldman Sachs lowered its year-end forecast for 10-year U.S. Treasury bonds from 1.9% to 1.6% last week. “Puzzling” drop Yields in recent months.

At the same time, the bank raised the year-end target for the S&P 500 index by nearly 10% to 4,700, believing that lower yields will support the stock market. But its stock analysts said that if interest rates rise faster, the U.S. stock index may fall slightly before the end of 2022.

S&P 500 index line chart shows Wall Street stock market soaring, partly due to low bond yields

Compared with its competitors, Citigroup insists on its forecast that the yield on the 10-year Treasury bond will rise to 2% this year, saying that this move will “put pressure on global stock valuations”. The bank said it will lower its recommendations on the US stock market to neutral, which favors technology companies whose stocks are considered particularly vulnerable to interest rate fluctuations.

Investment bank analysts, together with investors, attributed the sharp drop in yields to “technical” factors, arguing that the economic outlook implied by the February level was too pessimistic, given that the economy is recovering rapidly.For large asset management companies that are betting on higher yields and Hedge funds flooding in The “reinflation” transaction earlier this year.

Citi strategists said last month that there was evidence that the rally was driven by “forced buying” because bearish investors conceded losing trades.

Treasury market position data confirms the breaking of investor bearish consensus. According to data from the US Commodity Futures Trading Commission, speculative investors’ active bets on US Treasury futures at the end of July were the largest in about two months.

There are signs that the trend may be reversing, and last week’s strong US employment data helped raise yields to their highest level in more than three weeks.Traders will focus on the U.S. on Wednesday Inflation data There are further signs that the continuity of price increases is higher than expected.

Later this month, Fed Chairman Jay Powell is expected to set a timetable for “scaling down” Fed bond purchases at the Global Central Bank Governors Summit in Jackson Hole, Wyoming, and will have revised forecasts at that time Take another key test.

Nonetheless, if yields continue to rise and eventually trigger a stock sell-off, some analysts believe that bonds may start to rise again as investors seek safe assets.

Antoine Bouvet, senior interest rate strategist at ING, said: “It would be a very drastic adjustment to rise to 2% from here.” “There is a feedback effect, which means risk assets will be impacted and some funds will flow back to US Treasury bonds. This is The natural brake for rising yields.”

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