The Zhitong Finance App learned that Guojin Securities released a research report saying that in the medium term, maturity premiums on US bonds tend to correct, becoming a driving force for interest rates on long-term US bonds. In terms of risk premiums, a rise in the center of inflation or an increase in volatility has become a market consensus to a certain extent, which is likely to increase uncertainty about economic and monetary policies (compared to long-term zero interest rates after 2008). The risk premium required by investors will increase accordingly.
The following is a summary of the research report:
In a context where soft landing expectations continue to rise and oil prices continue to rise, interest rates on long-term US bonds have continued to rise, increasing fluctuations in risk asset prices. Will interest rates on US debt continue to reach new highs until the “boots” of the Fed's last interest rate hike are implemented? After the federal funds rate enters the “higher” range, what kind of pattern will the US bond interest rate take: a downward trend, a high level of oscillation, or an upward trend? After the Fed began cutting interest rates, was the center of interest rates on long-term US debt higher or lower?
Hot Thoughts: How strong is the upward pressure on US debt maturity premiums?
As of September 22, interest rates on 1-year, 10-year, and 30-year US Treasury bonds were 5.5%, 4.4%, and 4.5%, respectively. They are all close to the high points of the Fed's current interest rate hike cycle, as well as the highs since January 2001, November 2007, and April 2011, respectively. If the rule of thumb that “inversion of term interest spreads indicate economic recession” fails, then how will term interest spreads return to normal: further inflationary pressure triggers a rise in long-term interest rates, or wait until the Fed cuts interest rates?
The interest rate on long-term US debt can be broken down into two parts: expectations for future nominal short-term interest rates and term premiums.The so-called term premium compensates investors for the risk of holding long-term bonds. Generally speaking, term premiums are positive, but investors may also accept a negative term premium when holding long-term bonds “outweigh the disadvantages.” Up to now, term premium (term premium) is currently still a drag on long-term US debt interest rates (-52 bps).
Term premiums are related to risk appetite. The economic cycle, inflation, and uncertainty about the Fed's policies are all key factors.Term premiums are clearly countercyclical: they clearly rise in the economic recession range, while the expansion range tends to decline, and there is an obvious positive correlation with the unemployment rate. Term premiums are correlated with investors' differences in expectations about future economic operations (such as uncertainty about monetary policy). For example, during the “cutback panic” period in 2013, term premiums (and the MOVE index) clearly rose.
The maturity premium on US bonds is also related to the supply and demand relationship of treasury bonds.After the 2008 crisis, Western central banks, represented by the Federal Reserve, were greatly expanded, causing “excess” global liquidity and “creating” a shortage of safe assets. Since the beginning of 2015, the 10-year US bond maturity premium has entered a negative range, which is directly related to the expansion of the statements of the European Central Bank and the Bank of Japan. Furthermore, strong financial supervision, as represented by “Basel III,” and the strengthening of internal risk control of financial institutions have all increased the demand for safe assets.
In our opinion,In the medium term, maturity premiums on US bonds tend to correct, becoming a driving force for interest rates on long-term US bonds. In terms of risk premiums, a rise in the center of inflation or an increase in volatility has become a market consensus to a certain extent, which is likely to increase uncertainty about economic and monetary policies (compared to long-term zero interest rates after 2008). The risk premium required by investors will increase accordingly.
There has also been a systematic shift in the supply and demand relationship of US debt: on the supply side, the center of the federal government's deficit rate may rise markedly; on the demand side, it may be difficult for the central bank to become a marginal buyer of US debt until interest rates return to zero; in a context where term interest spreads are inverted, yield turns negative, and the correlation between equity and bonds changes from negative to positive, demand for banks, pensions and other institutional investors to allocate long-term US bonds tends to decline; anti-globalization is accompanied by “de-dollarization,” and demand for overseas allocation of US debt may also tend to decline.
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