U.S. Treasuries, touted as the world's safest asset, have seen an unprecedented sell-off in recent years. Not only foreign investors such as China, but even the United States' own central bank is also making a move**. What exactly is this for? What is the outlook for U.S. Treasuries? What impact will the volatility of U.S. bonds have on U.S. stocks and global financial markets? Let's take a look.
The reasons for the sell-off in U.S. bonds can be analyzed from two aspects: economic and political.
On the economic front, the main driver of the sell-off in Treasuries is the rise in Treasury yields. U.S. Treasury yields are negatively correlated with U.S. Treasury bonds**, and rising yields mean that investors will have less or even lose money on holding U.S. bonds. The rise in yields is related to inflation and interest rate hikes in the United States.
The United States has faced high inflationary pressures in recent years, and the price level has continued to **, resulting in a decrease in the purchasing power of the dollar. This has led investors to lose confidence in the real yield on US Treasuries (i.e., the yield after inflation), which could be below or close to zero. To hedge against inflation, investors demand higher nominal yields, which pushes Treasury yields higher.
In order to combat inflation, the Federal Reserve has also adopted a tight monetary policy, constantly raising interest rates and shrinking its balance sheet. This means that the Fed is reducing the demand for US Treasuries while raising interest rates in the market. This is undoubtedly worse for U.S. bonds, because the yield of U.S. bonds will be affected by market interest rates, and when market interest rates rise, U.S. Treasury yields will also rise.
From a political perspective, another reason for the sell-off in U.S. bonds is political instability and policy uncertainty in the United States. In recent years, the United States has experienced a series of political events such as congressional elections, wars, shutdowns, and the national debt ceiling, all of which have had a negative impact on the U.S. finances and economy, and have also made investors doubt the credibility and prospects of the United States. Especially in the context of the war, some countries may reduce their dependence on the United States and seek more diversification for political or strategic considerations, so as to reduce their dependence on the United States, thereby reducing their U.S. debt.
The consequences of the sell-off in U.S. bonds can be analysed at both the U.S. and global levels.
For the U.S., the immediate consequence of the sell-off is that the fiscal cost to the U.S. will increase, because the U.S. needs to raise funds by issuing more U.S. bonds, and the interest rate on the issuance of U.S. bonds is the yield on U.S. bonds. The rise in Treasury yields means that the United States will have to pay higher interest, which will increase the fiscal deficit and debt burden of the United States. The current fiscal deficit of the United States has exceeded $1 trillion, and the size of the debt has exceeded $33 trillion, accounting for more than 100% of GDP. If Treasury yields continue to rise, the US fiscal position could deteriorate further and even trigger a credit crisis.
For the world, the indirect consequence of the sell-off in US bonds is the volatility of the US dollar exchange rate and global financial markets. A rise in Treasury yields will attract more money into the United States, which will boost the value of the dollar. The appreciation of the US dollar will put pressure on the exports and economies of other countries, and will also affect global capital flows and asset allocation. At the same time, rising US Treasury yields will also raise the global risk premium, leading to higher bond yields in other countries, **market**. As the world's most important safe-haven asset, the volatility of U.S. bonds will have a significant impact on global financial stability and economic growth.
The outlook for the sell-off in U.S. bonds can be viewed from both the U.S. and global perspectives.
For the US, the outlook for a sell-off in US Treasuries depends on the direction of inflation and interest rate hikes in the US, as well as the direction of US politics and policy. If inflation in the United States can be controlled, the Federal Reserve can adjust monetary policy in a timely manner, the political stability of the United States can be restored, and the policy of the United States can be more pragmatic and cooperative, then the yield of US bonds may fall, the attractiveness of US bonds may be restored, and the sell-off of US bonds may slow down or stop. But if inflation in the U.S. remains high, the Fed is forced to accelerate the pace of interest rate hikes, U.S. politics continues to be volatile, and U.S. policies continue to be confrontational and isolated, then Treasury yields may continue to rise, the attractiveness of U.S. Treasuries may further decline, and the sell-off in U.S. Treasuries may intensify or continue.
Globally, the outlook for a sell-off in U.S. Treasuries depends on global economic and financial conditions, as well as the preferences and needs of investors around the world. If the global economy can maintain growth, financial stability can be maintained, and investors can look for more diversified and high-yield investments, then the demand for U.S. bonds may decrease, and the sell-off in U.S. bonds may continue or expand. But if there is a global recession, a financial crisis, and investors need more safe-haven and liquid investments, then the demand for U.S. bonds may increase, and the sell-off of U.S. bonds may moderate or reverse.
In conclusion, the sell-off in U.S. bonds is a complex phenomenon involving multiple factors and effects. We cannot simply judge whether US bonds are good or bad, nor can we blindly follow the trend or buck the trend. We need to rationally analyze and judge the value and prospects of U.S. bonds according to our own investment objectives and risk appetite, combined with the economic and financial dynamics of the United States and the world, and make appropriate investment decisions.