A scene that has never happened since the financial crisis! Read this article: Is the U.S. debt in big trouble?
If there were an award for “ridiculous predictions”, a U.S. government report from 25 years ago would definitely be on the podium. In January 2001, the U.S. Congressional Budget Office predicted that the U.S. government would experience a huge budget surplus in the future, and even stated that all redeemable government debt could be paid off within five years. In the same year, the U.S. Treasury Department stopped issuing its longest-term Treasury bond, the 30-year Treasury note - after all, it seemed at the time that continued issuance was unnecessary.
If there were an award for “ridiculous predictions”, a U.S. government report from 25 years ago would definitely be on the podium. In January 2001, the U.S. Congressional Budget Office predicted that the U.S. government would experience a huge budget surplus in the future, and even stated that all redeemable government debt could be paid off within five years. In the same year, the U.S. Treasury Department stopped issuing its longest-term Treasury bond, the 30-year Treasury note - after all, it seemed at the time that continued issuance was unnecessary. But everything that followed is now clearly understood by people - five years later, as the United States fell into war in the Middle East, implemented large-scale tax cut policies, and the economy fell into recession, the U.S. fiscal deficit expanded sharply, and the U.S. Treasury Department was forced to restart the issuance of 30-year Treasury bonds. Interestingly, despite returning to the market, such long-term government bonds have since become marginalized investment targets for a long time. But today, people may no longer be able to underestimate them-the latest alarm signal is that the real yield on the 30-year U.S. Treasury note after excluding inflation factors has surged to the highest level since the 2008 financial crisis. At the same time, so far this year, the number of trading days with the U.S. 30-year Treasury bond yield above 5% has been the highest since the early days of the financial crisis, reflecting investors' deep concerns about the expanding scale of U.S. government debt and stubborn inflation. According to data compiled by the industry, as of Wednesday, the 30-year U.S. Treasury yield has remained above the 5% mark for 27 trading days this year - including the most recent 12 consecutive trading days - which accounts for approximately 19% of the total trading days throughout the year. This is the most days and longest streak since 2007, when it traded above the 5% mark for 50 days. However, unlike in 2007, the Fed's benchmark interest rate is currently significantly lower by 150 basis points, suggesting that investors are demanding a higher yield premium to compensate for holding the longest-dated bonds issued by the U.S. Treasury than even at the outset of the subprime crisis... Are long-term U.S. bonds completely targeted by “bond vigilantes”? Behind the continued rise in long-term U.S. bond yields is growing concern about the deterioration of the U.S. fiscal situation. At the same time, a flood of bond issuance to finance AI infrastructure is flooding the corporate bond market. It evoked memories of the "bond vigilante" era of the last century - a term widely circulated in the 1980s, when investors dumped government bonds and pushed yields higher to force governments to adhere to fiscal discipline. "The bigger impact is that sovereign debt and fiscal deficits are at extremely high levels, which is keeping long-term U.S. Treasury yields elevated," said Tony Rodriguez, head of fixed income strategy at Nuveen Asset Management. Data show that since 2007, the size of the U.S. Treasury market has expanded from $4.5 trillion to $31 trillion, while the ratio of public debt to U.S. gross domestic product (GDP) has doubled to more than 100%. Years of excessive spending have pushed the U.S. government’s annual debt interest payments past the trillion-dollar mark. The United States is not alone among governments around the world that needs to finance huge debts that have surged since the 2020 pandemic. However, with the exception of the United Kingdom, the yield on 30-year U.S. Treasury bonds is currently significantly higher than that of other major debt countries such as Japan and France. Credit ratings agency Fitch recently warned that the U.S. debt burden is "significantly higher" than that of other countries that also have AA ratings. Debt concerns prompted Hoisington Investment Management, a well-known institution that has been bullish on the U.S. long-term bond market for decades, to abandon its bullish stance earlier this month, citing the "broader structural backdrop" of widening fiscal deficits and increased capital needs that could lead to continued higher inflation and long-term bond yields. Will the "5 Era" of long-term debt become the new normal? Currently, more than $500 billion in artificial intelligence-related financing is competing with government bond buyers. For fund managers, that's why 30-year Treasury yields above 5% are likely to be here for the long haul, rather than just a brief spike higher than they have been in the past.
Alex Payne, senior portfolio manager at Vanguard, said, "In the past few years, every time we saw the 5% yield level, long-term Treasury bonds were quickly snapped up. However, traditional buyers of 30-year Treasury bonds, such as pension funds and insurance companies, now have a broader menu of choices than in the past few years." Payne added that he was not sure whether long-term bond yields had peaked at this time. “Whether the issuer is a government, a hyperscale tech company or something else, in the long end of the market, credit bonds are now competing with more borrowers for the same investors,” Nuveen’s Rodriguez said. On Wednesday, the 30-year U.S. Treasury yield closed at 5.15%, breaking the 11-day streak of staying above 5% in May, when the long-term bond yield hit 5.2%, the highest level since 2007. Real 30-year yields, adjusted for inflation, have risen about 50 basis points this year to nearly 3%, a level last seen in 2008. Although the U.S. Treasury Department has tended to sell short-term Treasury bills in large quantities in recent years while keeping long-term bond issuance stable, pressure on the long end of U.S. debt continues. What is even more worrying is that this reliance on short-term Treasury bills may change sooner or later - because Wall Street institutions such as Goldman Sachs, Royal Bank of Canada, and TD Bank have generally expected that the U.S. Treasury Department will begin to expand the auction scale of interest-bearing Treasury bonds from 2 to 30 years before May 2027. "The deficit, outstanding debt and the likelihood that the Treasury Department will increase the size of auctions in the future are all factors that must be considered when considering how to price the back end of the yield curve," said Kevin Flanagan, director of investment strategy at WisdomTree. Hank Smith, head of investment strategy at Haverford Trust, pointed out that the question that clients have been asked repeatedly over the past 20 years is, "What do you do if the total outstanding debt (of the U.S. government) is so high?" His answer has always been "When debt really becomes a problem for this country, the bond market will tell you." Smith said that although the current U.S. debt auction has not shown obvious signs of weakness, everyone will face a test once there is severe turbulence in the bond market caused by fiscal problems. “We do think the biggest risk to markets — both bond markets and equity markets — is the possibility of a resurgence of bond vigilantes,” he said. The impact may not be limited to the bond market U.S. Treasury yields affect borrowing costs across the economy, affecting everything from the interest rates on new debt issued by companies to the cost of mortgages. In the past, U.S. bond yields have typically moved in an orderly manner, but when yields rise too quickly or diverge from economic fundamentals, it can signal trouble — which is why many Wall Street institutional investors are currently paying close attention to the bond market. Although compared to the 10-year U.S. Treasury note, which serves as a daily benchmark in financial markets and is directly linked to home mortgage rates, the 30-year ultra-long bond has received less attention. However, at some levels, it actually has more warning value - because its price is extremely sensitive to changes in macroeconomic assumptions. And the signals it has recently sent out do not bode well for Wall Street and Washington. Bonds have a property called "duration," which is the weighted average length of time it takes for investors to receive all of their cash flows. The same is true for stocks, but the only difference is that stocks have no expiration date and future cash flows are full of unknowns. Today's most popular leading technology stocks generally have ultra-long-term horizons: they currently pay almost no dividends, and rely solely on the high forward profits they will generate when they dominate the market in cutting-edge fields such as artificial intelligence and space exploration to attract investors. This means that the future cash flows of stocks cannot be evaluated in isolation and must be compared horizontally with the risk-free returns that investors receive from the government. Since the duration of the 30-year Treasury bond is closest to that of the S&P 500 Index, the rise in its real yield has in disguise raised the investment threshold for equity assets, assuming other conditions remain unchanged. This explains why technology stocks tend to fall along with bond prices when hot employment or inflation reports come out.
In addition, the 30-year Treasury bond yield is also silently questioning the financial situation of the U.S. government. Although U.S. debt issuance is currently dominated by short-term debt, and ultra-long-term debt itself will not directly and significantly increase federal interest payments, it intuitively reflects the capital market's growing doubts about the government's long-term debt solvency. Although the possibility of direct bankruptcy and default by the United States and other developed countries facing debt pressure is extremely slim, default is not the only way to resolve unsustainable debt. Rapidly diluting the real value of debt by allowing inflation to soar is one of the ways to covertly maintain positions. Politicians may be able to push the debt burden back five or even 10 years in the hope that the next ruler will bite the hard nut, but in the face of a 30-year span, this delaying tactic will eventually fail. In fact, after the 30-year U.S. Treasury yield began to hover around the 5% mark for a long time, many people in the industry are currently paying close attention to the trends in the 10-year U.S. Treasury yield, the "anchor of global asset pricing." Some analysts warn that if the 10-year U.S. Treasury yield breaks through the recent high of 4.687%, its rise may accelerate as traders seek a new equilibrium point, and may even eventually break the 5% mark. Since the 2008-09 financial crisis, the 10-year Treasury yield has only reached 5% in October 2023. At the time, a sharp rise in yields hammered stocks and raised concerns about the potential economic fallout...
Alex Payne, senior portfolio manager at Vanguard, said, "In the past few years, every time we saw the 5% yield level, long-term Treasury bonds were quickly snapped up. However, traditional buyers of 30-year Treasury bonds, such as pension funds and insurance companies, now have a broader menu of choices than in the past few years." Payne added that he was not sure whether long-term bond yields had peaked at this time. “Whether the issuer is a government, a hyperscale tech company or something else, in the long end of the market, credit bonds are now competing with more borrowers for the same investors,” Nuveen’s Rodriguez said. On Wednesday, the 30-year U.S. Treasury yield closed at 5.15%, breaking the 11-day streak of staying above 5% in May, when the long-term bond yield hit 5.2%, the highest level since 2007. Real 30-year yields, adjusted for inflation, have risen about 50 basis points this year to nearly 3%, a level last seen in 2008. Although the U.S. Treasury Department has tended to sell short-term Treasury bills in large quantities in recent years while keeping long-term bond issuance stable, pressure on the long end of U.S. debt continues. What is even more worrying is that this reliance on short-term Treasury bills may change sooner or later - because Wall Street institutions such as Goldman Sachs, Royal Bank of Canada, and TD Bank have generally expected that the U.S. Treasury Department will begin to expand the auction scale of interest-bearing Treasury bonds from 2 to 30 years before May 2027. "The deficit, outstanding debt and the likelihood that the Treasury Department will increase the size of auctions in the future are all factors that must be considered when considering how to price the back end of the yield curve," said Kevin Flanagan, director of investment strategy at WisdomTree. Hank Smith, head of investment strategy at Haverford Trust, pointed out that the question that clients have been asked repeatedly over the past 20 years is, "What do you do if the total outstanding debt (of the U.S. government) is so high?" His answer has always been "When debt really becomes a problem for this country, the bond market will tell you." Smith said that although the current U.S. debt auction has not shown obvious signs of weakness, everyone will face a test once there is severe turbulence in the bond market caused by fiscal problems. “We do think the biggest risk to markets — both bond markets and equity markets — is the possibility of a resurgence of bond vigilantes,” he said. The impact may not be limited to the bond market U.S. Treasury yields affect borrowing costs across the economy, affecting everything from the interest rates on new debt issued by companies to the cost of mortgages. In the past, U.S. bond yields have typically moved in an orderly manner, but when yields rise too quickly or diverge from economic fundamentals, it can signal trouble — which is why many Wall Street institutional investors are currently paying close attention to the bond market. Although compared to the 10-year U.S. Treasury note, which serves as a daily benchmark in financial markets and is directly linked to home mortgage rates, the 30-year ultra-long bond has received less attention. However, at some levels, it actually has more warning value - because its price is extremely sensitive to changes in macroeconomic assumptions. And the signals it has recently sent out do not bode well for Wall Street and Washington. Bonds have a property called "duration," which is the weighted average length of time it takes for investors to receive all of their cash flows. The same is true for stocks, but the only difference is that stocks have no expiration date and future cash flows are full of unknowns. Today's most popular leading technology stocks generally have ultra-long-term horizons: they currently pay almost no dividends, and rely solely on the high forward profits they will generate when they dominate the market in cutting-edge fields such as artificial intelligence and space exploration to attract investors. This means that the future cash flows of stocks cannot be evaluated in isolation and must be compared horizontally with the risk-free returns that investors receive from the government. Since the duration of the 30-year Treasury bond is closest to that of the S&P 500 Index, the rise in its real yield has in disguise raised the investment threshold for equity assets, assuming other conditions remain unchanged. This explains why technology stocks tend to fall along with bond prices when hot employment or inflation reports come out.
In addition, the 30-year Treasury bond yield is also silently questioning the financial situation of the U.S. government. Although U.S. debt issuance is currently dominated by short-term debt, and ultra-long-term debt itself will not directly and significantly increase federal interest payments, it intuitively reflects the capital market's growing doubts about the government's long-term debt solvency. Although the possibility of direct bankruptcy and default by the United States and other developed countries facing debt pressure is extremely slim, default is not the only way to resolve unsustainable debt. Rapidly diluting the real value of debt by allowing inflation to soar is one of the ways to covertly maintain positions. Politicians may be able to push the debt burden back five or even 10 years in the hope that the next ruler will bite the hard nut, but in the face of a 30-year span, this delaying tactic will eventually fail. In fact, after the 30-year U.S. Treasury yield began to hover around the 5% mark for a long time, many people in the industry are currently paying close attention to the trends in the 10-year U.S. Treasury yield, the "anchor of global asset pricing." Some analysts warn that if the 10-year U.S. Treasury yield breaks through the recent high of 4.687%, its rise may accelerate as traders seek a new equilibrium point, and may even eventually break the 5% mark. Since the 2008-09 financial crisis, the 10-year Treasury yield has only reached 5% in October 2023. At the time, a sharp rise in yields hammered stocks and raised concerns about the potential economic fallout...