U.S. Dollar and U.S. Treasury Yields Continue to Hit Phase Highs

U.S. Treasury yields continue to climb. On October 23rd, Eastern U.S. time, the 10-year U.S. Treasury yield rose by 3.4 basis points to 4.24%, having previously touched a three-month high of 4.26%, while the U.S. Dollar Index also reached a two-and-a-half-month high. Why do U.S. Treasury yields and the dollar continue to "defy the trend" and rise under the interest rate reduction cycle? Can U.S. Treasury yields maintain high levels for a long time? What influencing factors should be closely watched for subsequent trends? Let's connect with Wang Youxin, a senior researcher at the Bank of China Research Institute.

Multiple Factors Affect the Contrary Rise of the U.S. Dollar and U.S. Treasury Yields

Recently, U.S. Treasury yields and the U.S. Dollar Index have risen against the trend during the Federal Reserve's interest rate reduction cycle, actually influenced by a variety of factors.

From the perspective of the U.S. economic fundamentals, recent data, including the U.S. labor market and retail sales, have improved beyond expectations, easing market concerns about a U.S. economic recession. At the same time, the pace of U.S. inflation's decline has slowed. The changes in these factors have prompted the market to adjust its expectations for the pace of Federal Reserve rate cuts. Looking at recent statements from Federal Reserve officials, they have gradually become more hawkish. Changes in expectations for the path of monetary policy adjustments have driven a rebound in U.S. Treasury yields and the U.S. Dollar Index.

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Furthermore, as the U.S. election voting day approaches, the "Trump trade" heats up again, and some trade policies that may be adopted after the U.S. election have reignited market concerns about U.S. inflation next year. This change has also driven changes in market expectations for the Federal Reserve's policy adjustment path, thereby providing more support for the U.S. Dollar Index and U.S. Treasuries.

Additionally, recent geopolitical tensions have escalated, and crude oil prices have risen again, increasing market concerns about the uncertainty and risks of the global economic recovery. Therefore, risk-aversion sentiment has also driven a rebound in the U.S. Dollar Index.

In the Medium to Long Term, the U.S. Dollar and U.S. Treasury Yields are Likely to Fall

However, overall, the U.S. economy remains in a downward channel, and the Federal Reserve's monetary policy is gradually shifting towards a more accommodative stance. Therefore, although the pace has slowed, the fundamental changes and trends in policy adjustments will not change in the medium to long term. Consequently, U.S. Treasury yields and the U.S. Dollar Index are likely to continue to fall in the medium to long term.

In the short term, however, there may be more fluctuations or risks of volatility. Therefore, it is crucial to closely monitor changes in U.S. inflation, the results of the U.S. election, and some key U.S. economic indicators in the future, as they will become key variables affecting the changes in U.S. Treasury yields and the U.S. Dollar Index.What Signals Does the U.S. Treasury Yield Curve Release?

Some argue that the rise in U.S. Treasury yields is actually an economic signal, suggesting that U.S. economic growth and inflation may be stronger than expected. In addition, relevant reports have pointed out that market concerns about U.S. fiscal policy may be the main reason for the rise in 10-year Treasury yields. How should we view the relationship between the rise in U.S. Treasury yields and economic growth? What changes in sentiment and expectations are implied behind this? Professor Li Huihui, a professor of management practice at EMLYON Business School in France, shares his insights with us.

The U.S. Needs to Beware of the Risk of "Overheating" the Economy

The rise in U.S. Treasury yields does indeed reflect, to some extent, the market's expectations for U.S. economic growth. When the economic outlook is positive, investors anticipate future inflation, which may lead the Federal Reserve to raise interest rates, resulting in falling bond prices and rising yields. The current rise in U.S. Treasury yields may indicate that the market has a certain level of confidence in the short-term recovery of the U.S. economy, especially against the backdrop of continued strong employment data and steady consumer spending.

However, we also need to be vigilant about the risk of "overheating." There is a critical balance point between economic growth and the rise in yields; if yields climb too quickly, they may suppress investment and consumption, which in turn could have a negative impact on economic growth. Moreover, higher financing costs will also put pressure on businesses and governments, especially in the context of expanding U.S. government deficits, where high yields may lead to increased fiscal burdens.

Market sentiment plays a significant role in the fluctuations of U.S. Treasury yields. Behind the current rise in yields is not only confidence in economic growth but also concern about the fiscal condition of the United States. The expansion of the U.S. fiscal deficit and the frequent emergence of the debt ceiling issue have led the market to question the U.S. government's debt repayment capacity. This uncertainty has intensified investors' selling of U.S. Treasuries, thereby driving up yields.

At the same time, the Federal Reserve's monetary policy is also affecting market sentiment. The market had initially expected the Federal Reserve to increase the magnitude and frequency of interest rate cuts, but due to the resilience of inflation, especially the high core inflation, the likelihood of the Federal Reserve maintaining higher interest rates has increased. This has filled investors with uncertainty about the future policy path, thereby increasing market volatility.

In summary, the continued rise in U.S. Treasury yields not only reflects adjustments in expectations for economic growth and inflation but also implies unease about fiscal deficits and the path of monetary policy. In the future, how the Federal Reserve deals with inflation, the sustainability of economic growth, and how the U.S. government handles debt issues will continue to influence market sentiment and the trend of bond yields.

U.S. Stock Market's Three Major Indices Close Lower

The suppressive effect of rising U.S. Treasury yields on the U.S. stock market seems to be emerging. On October 23, Eastern Time, the Dow Jones and S&P fell by about 1%, and the Nasdaq fell by 1.6%. Does this mean that, for investors, bonds are more competitive than the stock market? Can the U.S. stock market continue to maintain its strength under the current circumstances? Let's listen to what Gan Jingyun, the chief macro analyst at Chuangjin Hengxin Fund, has to say.U.S. Stocks and Bonds Face Certain Adjustment Pressures

The recent rise in U.S. Treasury yields is mainly related to the slowdown in interest rate cut expectations and the increasing热度 of the "Trump trade" as the election approaches.

On the other hand, after the Fed aggressively cut rates by 50 basis points in September, market expectations for rate cuts were relatively high. However, recent U.S. economic data has remained relatively strong, with inflation rebounding on a month-over-month basis and employment data showing some resilience, indicating that the entire U.S. economy is有望 to achieve a soft landing.

Against the backdrop of a relatively resilient economic foundation, some Fed officials have recently released hawkish remarks suggesting a slowdown or pause in the pace of rate cuts, leading to some adjustments in market expectations for rate cuts. The overall space for rate cuts has actually narrowed significantly.

Therefore, we have seen the recent upward movement in U.S. Treasury yields, which also exerts certain pressure on U.S. stocks from a valuation perspective. For investors, the "inflation expectations" driven by the current "Trump trade" jointly affect U.S. stocks, and both stocks and bonds face certain adjustment pressures.

U.S. stock pricing factors will return to fundamentals

We believe that the U.S. economic fundamentals will maintain a certain level of resilience in the short term; however, looking ahead, it is expected to gradually cool down, transitioning from "overheating" to stagflation. From the perspective of the denominator, the short-term overall rise in U.S. Treasury rates brings adjustment pressure at the valuation level, but the long-term direction is still one of easing.

In addition, the U.S. election actually has a certain degree of uncertainty impact on U.S. stocks. To go further, there are many uncertainties in the election process that could affect the U.S. economic fundamentals and the profits of U.S. companies. Therefore, we also tend to believe that during this period, in the more contentious stages of the election, it will lead to increased volatility in U.S. stocks.

In the long term, we believe that U.S. stock pricing factors will return to fundamentals, so whether it continues to be a loose monetary policy or a loose fiscal policy, it will actually provide a certain level of support for the U.S. economic fundamentals. If subsequent economic data further leans towards a scenario of a soft landing for the U.S. economy, then U.S. stocks are expected to continue to maintain strength.