U.S. Treasury yields soar, global asset pricing anchor shifts

Financial institutions described the situation as “abysmal”.

U.S. Treasury yields, known as the anchor of global asset pricing, have soared to a one-year high, and global capital markets have plunged. Financial institutions described the situation as “abysmal” and the bubble in the stock market and other assets may burst.

The Wall Street Journal reported on Feb. 27 that international stocks followed the decline in U.S. stocks on Feb. 26, and recent changes in bond prices have dampened investor interest in highly valued stocks.

Investors said that despite the U.S. Federal Reserve (Fed) Chairman Jerome Powell (Jerome Powell) to ensure that the will not soon raise interest rates, capital markets have been reassessing the Fed’s prospects for raising interest rates.

Federal Reserve Chairman Jerome Powell said at a Senate committee hearing on the 24th: “As the economy reopens, our spending could surge. We don’t see that as a sustained force over the long term, so you may see price increases, which is different from sustained high Inflation.”

Most of the world’s key stock markets fell on Feb. 26, with Asian stocks leading the way, such as the Nikkei 225, India’s SENSEX 30 and the Hang Seng Index, all down more than 3.5 percent, while Hong Kong stocks and China’s A-share market also fell further, with the Growth Enterprise Market Index down 11 percent for the week and the Hang Seng Index closing sharply lower at 3.64 percent. European markets followed the decline.

The U.S. stock market’s Nasdaq and S&P 500 indexes rose at one point during the day, before retreating in late trading. Declines in banks and health care stocks dragged the S&P 500 down, while lower oil prices weighed on energy stocks. Technology and communications services companies rebounded slightly, driving the tech-heavy Nasdaq Composite Index up 0.6%.

The yield on the 10-year U.S. Treasury note topped 1.6 percent at one point this week, the highest level since Feb. 14, 2020. The yield on the 30-year U.S. Treasury note rose to 2.323 percent. The yield on the 5-year U.S. Treasury note touched 0.862 percent, the highest level since March 3 last year.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, described the sale as “abysmal” and noted that the percentage of bonds held by dealers was well above the 12-month average, reflecting weak demand.

The most acceptable explanation is that the U.S. economy is recovering too quickly, perhaps even to the point of overheating, according to analysts cited by mainland Chinese media on Feb. 27. Judging from the statements of Federal Reserve officials and the Biden administration’s busy push for a $1.9 trillion stimulus package, inflation, or hyperinflation of the 1970s kind, seems not far away.

Another analysis pointed out that the $7 trillion mortgage-backed bond market forced selling has exacerbated the turmoil in the U.S. debt market, and these sellers may be reducing their holdings of long-term bonds or adjusting their derivative positions in response to the unexpected extension of the duration of their mortgage-backed bond portfolios. This phenomenon is known as “convex hedging,” and historically, these additional selling pressures have also exacerbated the rising trend in Treasury yields, including two major “convex events” in 1994 and 2003.

At the end of January, the 10-year U.S. Treasury yield was 1.09%. 2020 closed with the index well below 1%. As a result, it has fluctuated by more than half a percentage point in less than two months, which is quite fast for the bond market relative to interest rates, which are at historic lows.

Evercore ISI strategist Dennis DeBusschere noted that this is “a total collapse of the bond market. So this idea will permeate all other areas. It looks like the bond market just had a lightning bolt.”

Riedel, an Allianz Global Investors analyst, said this is reminiscent of the 2013 market sell-off, when yields spiked as traders thought the Fed would pull back on stimulus. “The lesson from the interest rate storm is that it’s not just bonds, but every asset class can be affected.”

Nolting, chief investment officer of wealth management at Deutsche Bank, noted that it is important to look at real yields, which have been a problem for stocks if they are indeed rising and rising rapidly, based on past experience.