2023-11-13 14:33:02
The U.S. stock earnings season is underway, but the U.S. bond market has a greater impact on U.S. stocks than any company fundamentals.
U.S. stocks have been volatile in recent months. But in comparison, the bond market’s trends are even more exaggerated. mid-october,10-year U.S. Treasury yieldIt soared from 3.95% at the end of June to nearly 5%, hitting a 16-year high, and buyers flocked to the property. By November 3, the yield rate fell back to 4.52%. Affected by fluctuations in yield rates, from the end of July to the end of October,S&P 500 IndexIt fell 10% and later rose 7.5%.
The impact of bonds on stocks was evident again last week. Last Thursday (9th), demand for the US$24 billion 30-year US Treasury bond auction was weak, and primary dealers were forced to subscribe for 25% of the issuance, which was more than twice the average level over the past year.This Treasury auction means that the U.S. Treasury Department must attract investors to buy bonds at prices above market interest rates, which have been rising before.S&P 500 IndexIt fell 0.8% on the day.
From this you can foresee what will happen next. In the 2023 fiscal year as of September, the U.S. federal government’s deficit was US$1.7 trillion, and massive borrowing means massive issuance of national debt. At the same time, the two largest buyers of Treasury bonds over the past decade have exited the market: the Fed is shrinking its balance sheet and China is reducing its holdings of U.S. Treasury bonds. It turns out that demand for U.S. Treasuries is not unlimited.
“If the Treasury auction fails, you can bet it will be a Minsky Moment, a moment when asset prices collapse,” said Tim Horan, chief investment officer of fixed income at Chilton Trust.
The impact of U.S. fiscal policy on yields will only grow. The deficit will be in the spotlight again this week, with Congress facing a deadline on Friday (17th) to avoid a government shutdown. Even the most optimistic don’t expect Congress to suddenly return to fiscal discipline and balance the budget under a new speaker of the House of Representatives. A more likely outcome is a government shutdown or some resolution that continues the current situation of spending exceeding revenue. It is not impossible for the 10-year US Treasury yield to return to 5%.
“The risk in the short term is rising yields,” said Adam Abbas, co-head of fixed income at Harris Associates. “The supply of U.S. debt is very large, the deficit is becoming more of a concern, and there doesn’t seem to be a real long-term solution in Washington.” “
The influence of fiscal policy is increasing, but at the same time, the Fed’s influence has not completely diminished. It is possible that the Fed will not raise interest rates again, but it is also possible that it will continue to raise interest rates. Fed Chairman Jerome Powell emphasized last week that further interest rate increases are not impossible. The Fed had seen some “illusions” of inflation before, and now needs to see that anti-inflation forces can last for more than two months before declaring that the task has been completed.
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