Ping An View:
Since early March 2022, the 10-year US bond yield has jumped from about 1.8% to about 2.8%, and the upward speed is much faster than the market expectation. In this report, we discuss in detail the four forces that push up the 10-year US bond yield, and look forward to its full year trend.
Strength 1: high inflation expectations. After the conflict between Russia and Ukraine, international energy and food prices soared, and US inflation indicators and inflation expectations rose. From late February to early March, the implied inflation expectation of 10-year tips treasury bonds surged 50bp to 2.9%; From early March to mid April, the inflation expectation remained high and volatile between 2.8-2.95% (it did not fall due to the rise of real interest rate). At present, the US inflation pressure has not eased substantially, and the market may not be sure whether the Fed can effectively curb inflation.
Strength 2: the economy is expected to improve. After the geopolitical conflict, the US bond market traded "inflation" and "stagnation" at the same time. The real interest rate of US bonds once fell by 50bp in the past 10 years. However, after mid March, the market's concern about "stagflation" in the United States has eased: the situation in Russia and Ukraine has not deteriorated; There is an inflection point in international commodity prices; US economic data are still relatively resilient. The Atlanta fed gdpnow model shows that the inflection point of US economic fundamentals (expected) is in early March, which exactly corresponds to the inflection point of the rebound of 10-year US bond real interest rate. Since April, the US employment data has been strong and the real interest rate has continued to rise.
Power 3: drastic changes in interest rate hike expectations. The drastic change of monetary policy expectation often leads to the drastic response of real interest rate. Just as under the "tightening panic" in 2013, the real interest rate of 10-year US bonds soared by about 100bp in one month. Since March this year, the US monetary policy is expected to undergo drastic changes in two aspects: first, the pace of raising interest rates has accelerated during the year. CME interest rate futures market expects the annual rate increase to be about 250bp from 200bp. Second, the "upper limit" of this round of interest rate increase is imaginative. In March, the Federal Reserve expected the interest rate to reach 2.8% from 2023 to 2024; St. Louis Fed chairman Brad recently advocated raising interest rates to 3.5%.
Strength 4: the supply of US debt has increased sharply. When the market expects the Fed's bond holdings to change, the real interest rate may react first. Recently, the path of the Fed's table contraction has gradually become clear, and the market began to pricein, and the supply of US bonds has increased. According to the minutes of the Federal Reserve's interest rate meeting in March, it may shrink its table by $95 billion a month, which is at the upper limit of market expectations. In particular, the liquidity of 10-year tips treasury bonds is weak, and the proportion held by the Federal Reserve is high, so the impact of scale reduction may be amplified. After this round of QE, the proportion of medium and long-term inflation index bonds held by the Federal Reserve in all treasury bonds increased by about 1.5 percentage points.
In the future, the disturbance to the real interest rate caused by the expectation of US interest rate increase and table reduction may be weakened. At the same time, it is difficult for inflation expectation and real interest rate to continue to rise synchronously. The fundamentals of the US economy, the level of policy interest rate and the supply and demand of US bonds will determine the fluctuation center of the real interest rate of US bonds. Based on our judgment on the rhythm of the Fed's interest rate hike in 2022 and referring to the trend of US bond yields during the Fed's interest rate hike and table contraction period from 2017 to 2019, we expect that in the second quarter of this year, "fast interest rate hike + table contraction" may continue to increase the 10-year US bond yield, with a high point of about 3.1%; In the second half of the year, as the Fed's tightening cycle enters the medium range, the pace of monetary policy tightening may "change from fast to slow", and the 10-year US bond yield may turn down, with the year-end level of about 2.6%, so the trend of the 10-year US bond yield may be "inverted V".
