Source: Zhitong Finance

On Tuesday EST, the US Treasury will begin selling US Treasury bonds totaling up to 125 billion US dollars. The rise in global stock and bond prices triggered by the rekindling of hopes that the Federal Reserve will cut interest rates this year will face the first major test since expectations of interest rate cuts have heated up. Powell's less tough remarks and weak employment boosted global bond prices last week, and this week, the US Treasury will issue 125 billion US dollars of 3-year, 10-year, and 30-year US Treasury bonds.

According to information, since Federal Reserve Chairman Powell made much milder remarks than expected after the interest rate decision last week and the release of weak non-agricultural data, global investors have been buying bond-like assets such as treasury bonds and corporate bonds in large numbers, as well as stock assets. On Tuesday EST, as part of the so-called quarterly refinancing of US Treasury bonds, global bond investors will have to absorb 58 billion US dollars of three-year US Treasury bonds. Later this week, the US Treasury will issue 10-year US Treasury bonds totaling 67 billion US dollars and a longer 30-year US Treasury bond.

This sale of US Treasury bonds will show whether investors are keen to continue buying treasury bonds, an almost risk-free asset after the recent sharp drop in US bond yields. In the past week, the yield on 2-year US Treasury bonds and the 10-year US Treasury yield, which has the title of “the anchor of global asset pricing”, fell by more than 20 basis points (the trend in bond yield is the exact opposite of the price trend). The decline in 10-year US Treasury yields largely contributed to a marked rebound in the value of risky assets such as stocks.

The large-scale sale of US bonds will also test the market's interest in longer-term bonds. As the Fed's slogan of maintaining higher for longer (higher for longer) for a long time becomes popular, the trend of term premiums has worsened the interest of some investors in longer-term bonds.

Since this year, US inflation data and hot employment and consumption data have been released for three consecutive months, causing the US bond market's aggressive expectations that the US benchmark interest rate will “stay high for a longer period” (higher-for-longer) to continue to ferment. The 10-year US bond yield once soared to 4.74% this year, the highest point since October last year.

Not only are global bonds facing tests, but trends in risky assets such as stocks are also being tested

If US bonds of up to 125 billion US dollars of various matures are not successfully sold in full this week, this means that the supply of US bonds exceeds the demand for US bonds by global bond investors, which will often stimulate the yield on US bonds of various matures. In particular, the yield on 10-year US bonds with the title of “the anchor of global asset pricing” will soar.

In October 2023, the “anchor of global asset pricing” once rose above the landmark integer mark of 5% and soared to the highest level since 2007. The 10-year US bond yield will completely disrupt the global risk asset trend in the second half of 2023. If the 10-year US bond yield regains an upward trend recently, the market cannot help but worry about whether it will once again hit the price of risky assets such as stocks and cryptocurrencies hard.

From a theoretical perspective, the 10-year US Treasury yield is equivalent to the risk-free interest rate indicator r on the denominator side of the DCF valuation model, an important valuation model in the stock market. There have been no significant changes in other indicators (in particular, cash flow expectations on the molecular side). Even when the centralized disclosure period for the April-May US stock earnings season may be biased against expectations, the higher the denominator level or continued to operate at historically high levels. Valuations of risky assets such as high-valued global technology stocks, high-risk corporate bonds, and riskier emerging market currencies are facing a trend of collapse.

“US bond yields for various maturities have declined sharply over the past week, so the US bond offering scale of up to 125 billion US dollars should be a good test of the current yield level,” Benjamin Schroeder, NV interest rate strategist at ING Bank, wrote in a report. “In the short term, the trigger for boosting treasury bond yields, the risk-free yield benchmark, is still likely to come from the US.”

According to TD Securities, the 10-year US Treasury yield could reach 5%, or even higher. Prashant Newnaha, a strategist at TD Securities (TD Securities), is a bearish predictor that the price of US bonds may fall further. The strategist based in Singapore said, “Our feeling is that unless the Federal Reserve officials change their positions to liberals and let the risk market take notice, there is still more room to sell off fixed income assets. It is not impossible for the US 10-year Treasury yield to rise to 5% or more.

US Treasury bond prices began to rebound across the board after Federal Reserve Chairman Powell denied the need for further interest rate hikes and hinted that once inflation data was guaranteed and confidence that inflation returned to 2% increased, interest rates would be cut immediately. A government report released on Friday showed that US non-farm payrolls and wage growth were unexpectedly weak last month, adding new evidence to the recent cooling of the US economy and inflation.

However, investors are still cautiously raising their bets on the Fed's easing policy. Swaps linked to the date of the Fed's meeting fully price the possibility that the Fed will cut interest rates by 25 basis points in the November interest rate decision, and the possibility of cutting interest rates twice in total during the year is 77%, not close to 100%. Prior to the most recent FOMC meeting, the market also expected to cut interest rates only once in 2024, but the latest time for the first rate cut was moved from before December to November.

The rise in US treasury bonds has spread to other countries' bond markets. In the past week, the yield on 10-year treasury bonds in the German bond market fell by nearly 15 basis points, and the yield on British 10-year treasury bonds fell by about 20 basis points. Australia's 10-year treasury bonds fell by more than 10 basis points.

The global stock market also recently rebounded sharply. In Hong Kong stocks, declining US bond yields helped the Hang Seng Index enter a technical bull market for 10 consecutive days. It was the best-performing major global stock index in April, rising more than 7% in April; the US stock benchmark index, the S&P 500 index, rose nearly 5% since April 22, and the UK FTSE 100 index rose nearly 6% during the same period. The MSCI Emerging Markets Stock Index recorded its best weekly performance since July before the May 1st holiday.

Stock bond investors need to keep an eye on US bond sales data and inflation data

Therefore, whether the rise in the global equity market can continue depends on US bond sales data — including whether the yield at the time of auction issuance is in line with market expectations and whether the scale of issuance is in line with the actual volume, and economic data to be released soon — the focus is on the US April inflation report to be released next week. This data can be described as the most important market driver.

Despite signs of a sharp slowdown in growth in some sectors of the US economy, the overall rate of inflation remains high, particularly inflation in core services excluding housing — a reality that may significantly limit the Fed's policy actions, and means that yields on US bonds of various matures may remain within the immediate range.

Compared to the relatively low levels earlier this year, US Treasury yields are still high, which helps buyers seeking to lock in higher yields to continue participating in recent US bond auctions. According to data compiled by global asset management giant State Street Bank (State Street), the allocation ratio of fixed income assets rose 0.4 percentage points to 27.9% in April, the biggest monthly increase since March 2023, while the allocation ratio for stocks and cash assets declined. Statistics show that demand is concentrated on treasury bond assets.

Michael Metcalfe (Michael Metcalfe), head of macro strategy at State Street Global Markets (State Street Global Markets), said: “If US interest rates actually continue to remain high and stable now, investors may begin to re-evaluate their serious holdings reduction ratio in fixed income such as treasury bonds. It seems that they have already started doing this in April.”