In recent times, the upward trend of U.STreasury yields has cast a shadow over the global financial market, creating an atmosphere of tension and uncertainty.

On October 23, the yield on the benchmark 10-year U.S

Treasury bond surged above 5%, reaching its highest level since 2007. This spike signals ongoing selling pressure in the bond market, as rising yields typically indicate decreasing bond prices.

The downward spiral of U.STreasury prices has reverberated across global financial markets, with the S&P 500 index declining for five consecutive days, hitting a fresh low for the first time since May.

On October 24, major Asian markets experienced fluctuations, with indices like Hong Kong's Hang Seng and South Korea's Kospi facing declines during intraday trading.

Since mid-July, the rise in U.S

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Treasury yields has accelerated.

Federal Reserve officials and recent robust U.Seconomic data suggest that rates could remain elevated for longer than many had anticipated.

Henry Ma, Managing Director and Head of Fixed Income for Asia Pacific at Invesco, outlined five key reasons contributing to the rise in U.STreasury yields.

Firstly, strong U.S

economic growth in the first half of the year has exceeded expectations. This led to an upward revision in economic forecasts while expectations for unemployment declined, which necessitated a repricing of the Federal Reserve's interest rate trajectory.

Secondly, although U.Sinflation has trended downward this year, it remains above the Federal Reserve's target. Core inflation levels are relatively high, and the recent increase in oil prices has added upward pressure.

The U.S

Department of Labor's latest data shows that the Consumer Price Index (CPI) rose by 3.7% year-over-year in September, with a month-over-month increase of 0.4%, both surpassing expectations.

Thirdly, the Fed’s hawkish signals contribute significantly. The central bank’s confidence in the economic outlook has influenced many perspectives on the pace of interest rate hikesInitially, many anticipated a move towards deflation, but no such trend has emerged.

Last week, Jerome Powell of the Federal Reserve delivered an important speech ahead of the November policy meeting, indicating that the Fed might maintain its current stance for the time being, yet highlighted that further rate hikes could occur if evidence of strong economic growth emerges.

Powell asserted that U.S

inflation remains unacceptably high, and the pathway to curbing it could be rocky and time-consuming; the Fed aims to sustainably reduce inflation to 2%, which may necessitate a period of economic growth below trend and further weakening of labor market conditions.

Additionally, on the following Friday, Cleveland Fed President Loretta Mester remarked that she believes that the Fed might raise interest rates again this year, which aligns with the dot plot released in September.

Fourthly, from a supply-demand perspective, the market struggles to absorb a significant amount of Treasury supply; increased yields are necessary to improve their attractiveness.

On the supply side, the U.S

government is likely to continue operating with high deficits in the foreseeable future, indicating that substantial debt issuance will persistAccording to the U.STreasury, net issuance plans for the third and fourth quarters stand at $1.01 trillion and $852 billion, respectivelyConcurrently, the Fed is actively reducing its Treasury holdings through quantitative tightening, having cumulatively decreased its holdings by $1.3 trillion since 2022, which adds to the supply constraints in the market.

On the demand side, overseas investors have generally reduced their holdings, with total debt holdings declining by $121 billion since 2022.

As of the end of August, mainland China, as the second-largest foreign “debtholder,” saw its Treasury holdings drop to $805.4 billion, marking a 14-year low

Meanwhile, the largest “debtholder,” Japan, reduced its Treasury holdings by $30.4 billion in May, marking the most substantial monthly reduction since October of the previous year.

Fifthly, the downgrade of the United States' international credit rating has had an impact. On August 1, Fitch Ratings lowered the U.Slong-term foreign-currency issuer default rating from “AAA” to “AA+.” This downgrade has led many funds, which would normally qualify for an AA rating, to sell off or reduce their positions.

The ramifications of surging U.S

Treasury yields extend far and wide; they are seen as foundational to the global financial system.

Analysts indicate that higher U.STreasury yields and premiums will tighten financial conditions, suppressing investor appetite for stocks and other risk assets while inflating credit costs for both corporations and individuals.

According to S&P Global Market Intelligence, global stock markets have recently plummeted to the lowest levels since April. The S&P 500 index has dropped about 7% from its peak this year, as the confidence in government-guaranteed Treasury yields has drawn investors away from equities

Mortgage rates have also soared to levels not seen in over 20 years, posing significant pressure on the U.Shousing market.

In the corporate debt sector, the recent surge in U.STreasury yields has caused credit spreads to widen, raising financing costs for potential borrowers; the stress on junk bonds is particularly acuteAn index tracking global high-yield bonds recently recorded an average yield of 9.26%, the highest level since November of last year, nearly double that of early 2022.

Interestingly, the soaring Treasury yields have accelerated demand for the U.S

dollarSince mid-July, as Treasury yields have risen, the dollar has appreciated by approximately 7% against a basket of G10 currencies. The dollar index, a measure of its strength against six major currencies, has recently approached its highest level in 10 months.

Currently, major financial institutions like Bank of America, Morgan Stanley, and Goldman Sachs are suggesting that U.STreasury yields have largely run their course.

Morgan Stanley noted that when the 10-year Treasury yield hits 5%, it could represent an “excellent entry point” for investors.

Goldman Sachs predicts that the 10-year Treasury yield could decline to around 4.2% to 4.3% in the short term.

Bank of America’s Chief Investment Strategist, Michael Hartnett, asserts that U.S

Treasury bonds will be among the best-performing assets in the first half of 2024.

Beyond the major investment banks, some notable individuals who previously bet against U.STreasuries are also looking to step back.

On October 23, renowned hedge fund manager Bill Ackman, founder of Pershing Square Capital Management, announced that he had closed his short position in long-term Treasuries.

Ackman expressed concerns over the abundance of global risks and suggested that continuing to short the bond market at current interest rates was ill-advised, additionally noting that the U.S

economy appears to be slowing faster than recent data suggests.

Following Ackman’s comments, the yield on the 10-year Treasury fell sharply during intraday trading, declining over 10 basis points to around 4.88%.

Bill Gross, renowned as the “bond king,” posted on October 23 that he was purchasing short-term rate futures linked to the secured overnight financing rate (SOFR). He anticipates that the spread between two- and ten-year Treasury yields, as well as that between two- and five-year yields, will turn positive before year-end.

Gross’s purchases of short-term rate futures stem from his prediction of a forthcoming economic recession in the U.S