Plexus: It is expected that the medium- to long-term U.S. Treasury yields will rise, and the yield curve will become steeper

According to the Zhitong Finance APP, Arif Husain, Global Fixed Income Head and Chief Investment Officer at PIMCO, pointed out that the market is currently in a "calm before the storm" phase, following the U.S. elections and before the presidential inauguration. Investors are digesting various factors affecting U.S. Treasury yields. As the Federal Reserve's interest rate cuts will set a lower limit for short-term yields, it is still expected that medium- and long-term Treasury yields will rise, yield curves are tending to steepen. The new U.S. government brings new information and uncertainties, as well as more variables.

U.S. Fiscal Expansion Continues, Economy Remains Robust

According to data from the U.S. Congressional Budget Office, the U.S. budget deficit for the fiscal year 2024 is projected to be 7.0% of Gross Domestic Product (GDP). With the Trump administration's commitment to tax cuts, the chances of a significant reduction in the budget deficit are slim. The U.S. Treasury will need to continue issuing a large amount of new debt to finance the budget deficit, pushing up yields.

Additionally, given that governments around the world are taking similar actions, the competition for market funds may drive up global yields. The market typically analyzes the U.S. fiscal situation as an independent case. However, in the post-pandemic era, global sovereign debt has reached its highest level since the 1980s, and the balance sheets of governments are under significant pressure, so this analytical approach may have substantial deviations.

The Federal Reserve seems to have successfully achieved a soft landing for the economy. Based on current economic trends, the chances of a recession in the short term are minimal. The Federal Reserve appears to be committed to maintaining an accommodative monetary policy, even though the market and the Fed have quickly revised down the expected number of interest rate cuts in the next 12 months, which may reflect that inflation could rebound.

Demand for U.S. Debt from Overseas Investors Decreases, Inflation May Resurge

There are signs that overseas investors' demand for U.S. Treasuries is weakening. As of September 2024, Japan's holdings of U.S. Treasuries have fallen from a peak of $1.3 trillion in 2021 to about $1.1 trillion. As the Bank of Japan prepares to tighten monetary policy again in 2025, more Japanese investors may withdraw from the U.S. Treasury market and shift to domestic markets. China's holdings of U.S. Treasuries have also continued to decline from about $1.1 trillion in 2021 to approximately $770 billion in September 2024. The volatility of U.S. Treasuries has surpassed that of other high-quality developed market government bonds and even some emerging market sovereign bonds, which may lead some investors to adopt a wait-and-see approach.

Recently, although inflation has eased somewhat, many policy measures seem to be driving inflation and economic growth. Therefore, it will be crucial to observe the "red lines" during the actual implementation of policies, but there is often a significant time lag between policy changes and their subsequent economic responses. As the market generally agrees, tariff policies can often push up inflation. Among all the campaign promises of the new U.S. government, the anticipated adjustments to immigration policy may be the primary factor driving inflation.