Long-Term U.S. Treasuries Regain Favor on Wall Street: What Has Changed?
Following its breakthrough of the 5% milestone last week, the $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ has fallen by nearly 15 bp from its peak. Meanwhile, the $U.S. 20-Year Treasury Bonds Yield (US20Y.BD)$ and $U.S. 30-Year Treasury Bonds Yield (US30Y.BD)$ have also decreased by 17bp and 13bp respectively since their highs on October 19th. Amidst a flurry of “Buy the Dip”, long-term Treasury bond funds such as the $iShares 20+ Year Treasury Bond ETF (TLT.US)$ have emerged as one of the hottest investments on Wall Street in late October.
Investments are flooding into the $iShares 20+ Year Treasury Bond ETF (TLT.US)$, one of America's largest bond funds. This fund passively invests in long-term U.S. Treasuries, managing an unprecedented $40 billion this year - a historically high level. Furthermore, according to EPFR data, inflows into long-dated U.S. Treasury funds hit a record high of $5.7 billion during the week ending on October 25th.
Steve Laipplyjinri, the global co-head of BlackRock's iShares fixed income ETFs, stated that the institution has started to notice capital inflows in the near term and anticipates that this trend will further accelerate as investors search for cues suggesting that yields have reached their peak.
1. The Treasury Department lowered its Q4 borrowing projection by $76 billion, which is lower than analysts' expectations
The imbalance between the supply and demand for the U.S. Treasury has been a major contributor to the rise in the term premium of the U.S. Treasury and an upsurge in long-term Treasury yields in the previous period. On Monday, the Treasury Department released data that showed a surprising decrease of $76 billion in the projected borrowing amount of the federal government for Q4. The new forecast is $776 billion, down from the previously anticipated borrowing amount of $852 billion in late July. This unexpected shift may suggest that the supply of the U.S. Treasury could have less pressure on the market than previously expected.
2. The increase in U.S. Treasury yields reduces the need for interest rate hikes
WSJ's Nick Timiraos, known as the “Fed whisperer”, cited Deutsche Bank's analysis on Monday, which pointed out that the increase in U.S. Treasury yields since September could be sufficient to tighten financial conditions. Economists suggest that this is roughly equivalent to three rate hikes of 25 basis points each. In other words, higher Treasury yields may bring an end to the Fed's historic interest rate increases.
In fact, Fed Chairman Powell also acknowledged that higher term premiums could substitute for Fed rate hikes in short-term rates.
3. The future of U.S. stocks is still uncertain
Currently, the combination of a high interest rate environment and uncertain economic prospects has created challenges for U.S. stocks, leading to a situation where the U.S. Equity Risk Premium is rapidly dissipating. Furthermore, as geopolitical conflicts and market volatility continue to escalate, demand for safe havens in U.S.Treasuries may increase, which could make long-term U.S.Treasuriesmore appealing to investors.
Amy Xie Patrick, the head of income strategies at Pendal Group in Sydney, expressed her confidence in bonds due to their current yields. As she sees it, there is little evidence to suggest that inflation and economic growth will pick up pace again, which indicates that "the 'soft landing' is behind us."
Roger Hallam, the Global Head of Rates at Vanguard Asset Management, stated that the company has recently been purchasing 5- to 10-year Treasuries and intends to "increase their holdings if yields continue to go up."
Despite the optimism of some investors, other strategists have issued warnings that there is still a risk of higher yields.
Phillip Colmar, the global strategist at MRB Partners, has expressed his belief that yields could potentially surpass 5.5% in 2024.
Similarly, Adam Phillips, the Managing Director of Portfolio Strategy at EP Wealth Advisors, suggested that a potential government shutdown in November could contribute to pushing yields even higher.
Source: Bloomberg, CNBC, Financial Times, Insider, Investment News
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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TheOtherGuy2022 : Why would we the retail invester buy treasury bonds if china is selln, other nations are selln, even the federal reserve and the banks are selln? So we can hold the bag while they all invest back in the equity market at discount...hhahhaha nah not happening!