February** Dynamic Incentive Program
The U.S. economy is in jeopardy, and the Treasury market is in turmoil. On Feb. 6, U.S. regulators issued new rules requiring proprietary dealers and other companies that frequently trade U.S. Treasuries to register as broker-dealers to address the liquidity of the $26 trillion U.S. Treasury market. The move is seen as the biggest overhaul of the U.S. Treasury market in recent decades, but it also exposes the economy's inability to respond to the sell-off in Treasuries.
Proprietary traders have become "key" to liquidity in the U.S. Treasury market, bringing them under a stricter regulatory regime, the U.S. Securities Commission said. However, market analysis points out that the new rules may further deplete the liquidity of US Treasury bonds, leading to an increase in the cost of investors participating in US bonds, which is counterproductive.
Treasury yields have climbed sharply, with yields on 2-year to 30-year maturities surging as of Feb. 6. In the case of the 10-year Treasury note, interest rates soared by 137 basis points, soaring to 4161%, the largest two-day increase since June 2022. This is not only a frenzied sell-off in the U.S. bond market, but also the market's extreme concern that the U.S. economy is mired in a quagmire.
The U.S. Congress announced a $118 billion spending bill on February 4 that covers multiple projects, including funding for Ukraine, Israel, border security, U.S. Command and Red Sea conflicts, and allies in the Indo-Pacific. This once again highlights the decline of US influence in the Middle East and the Red Sea region, which urgently needs a lot of money to solve various economic and security problems. Under the pressure of economic debt, the U.S. federal government must hedge against growing deficits by issuing huge amounts of debt. In the first three months of fiscal year 2024, the cumulative deficit in the United States reached $510 billion, up 21. year-on-year14%。As a result of rising interest rates, the cost of maintaining U.S. Treasuries has become prohibitively expensive, with the cost of paying total interest on the Treasury debt exceeding $1 trillion a year, doubling in nearly three years.
The U.S. Treasury missed the opportunity to restructure its Treasury debt at historically low interest rates, making existing debt more costly. Fed Chair Jerome Powell and Minneapolis Fed President Kashkari have shown that the probability of a rate cut in March is almost zero. Even after the rate cut, the federal benchmark rate has reached 525%-5.5%, and a large number of U.S. Treasury bonds issued this year will still face high interest costs.
This has raised concerns that US Treasuries are growing into a timed fiscal bomb. JPMorgan Chase & Co. CEO Dimon warned that ballooning US debt could lead to disaster, and at this time of crisis, the US Treasury seems to be pinning its hopes on China to become the main buyer of US bonds. However, since 2019, China has been net selling US Treasuries, with holdings falling to $782 billion and net selling amounting to $680 billion. This makes China no longer the largest holder of U.S. Treasuries, but the largest net seller after the Federal Reserve.
At the same time, more and more capital is flowing into the Chinese market at an accelerated pace, and many wealthy people in the Middle East have reduced their dependence on the United States and invested a lot of money in the Chinese economy. The renminbi is also showing a strong** trend against the US dollar, further indicating that global funds are withdrawing from the US Treasury market and redirecting to the Chinese market.
The vicissitudes of the U.S. Treasury crisis have not only affected the global economic landscape, but also plunged the United States into unprecedented predicament. The intertwining of the debt problem, the economic downturn, and the rising cost of debt is like a time bomb hanging over the head of the US economy, threatening global financial stability at all times.