"US Hard Landing" the preferred safe haven? US Treasury bonds have risen for seven consecutive times

The worrying economic situation in the United States deepens market risk aversion, with US Treasury bonds continuously rising.

On Friday, August 2nd, US Treasury bonds have risen for 7 consecutive trading days. The yield on the 10-year US benchmark Treasury bond has fallen below 4% for the first time since February, currently standing at 3.937%.

The policy-sensitive 2-year US Treasury bond yield has dropped to around 4.1%, hitting a 14-month low. By the end of July, the Bloomberg US Treasury Index, which tracks US Treasury bonds, has risen for the third consecutive month, marking the longest monthly consecutive rise since July 2021.

Overnight, the US July ISM Manufacturing PMI was 46.8, significantly lower than the market's expected 48.8 and the previous value of 48.5 in June, marking the largest contraction in eight months and intensifying concerns about a US economic recession. Subcomponents such as employment, output, and new orders all weakened significantly.

Swap contracts indicate a 50% probability of the Fed cutting rates by 100 basis points in 2024, and a 50% probability of a 50 basis point rate cut in 2024. This week, Fed Chair Powell hinted that unless inflation slows significantly, a rate cut may occur at the next meeting in September.

Increasingly tense geopolitical conflicts and slowing US economic data are driving investors towards safe-haven assets.

Damien McColough, Head of Fixed Income Research at Westpac Banking Corporation, stated that the sentiment in the US Treasury bond market is very positive. If employment data supports market expectations of a rate cut, the yield on the 10-year US Treasury bond may further decline to 3.8%.

Analysts expect a slowdown in July's job growth and wage increases, further confirming the weakness in the US labor market. Currently, investors are closely watching the non-farm payroll data to be released tonight. Investors are concerned that if the labor market significantly cools down further, the Fed may not have enough time to address the economic slowdown.

However, China International Capital Corporation (CICC) does not completely agree with concerns about the US economy entering a recession. The institution believes that equating a slowdown with a recession without distinction can lead to overly pessimistic views on risk assets and overly optimistic views on safe-haven assets. Moreover, the term "recession" itself is not precise and lacks a unified measurement standard.

CICC stated that when comparing a "soft landing" slowdown with a "hard landing" recession, one needs to consider the depth of the decline and whether the Fed's rate cuts can "rescue" the situation. There are generally two reasons for a recession: unexpected credit risk shocks and financing costs significantly higher than investment returns leading to sustained pressure, causing credit contraction. Currently, there are no clear signs of this. During the rate cut cycle in 2019 and earlier this year, the US manufacturing PMI was at similar or even lower levels. Rate cuts or expected rate cuts led to a gradual recovery after financial conditions loosened, and the rapid decline in interest rates now and potential future rate cuts also have a similar easing effect, gradually repairing some rate-sensitive demand, such as the recovery in real estate earlier this year