U.S. Treasury Bonds: The "First Knife" that Betrayed Trump?

U.S. Treasuries may give Trump a headache next year. Since his election, Trump has been concerned about the U.S. stock market and values the dollar, but he seems particularly unconcerned about U.S. Treasuries. However, the quietly rising yields on U.S. Treasuries may bring significant trouble to both the Trump administration and the market next year.

The strange pricing of U.S. Treasuries. We can come up with many reasons for the rise in U.S. Treasury yields since Trump's election, such as the inflation risks brought by Trump's new policies or the Federal Reserve's hawkish turn, but upon closer comparison, there may be some oddities:

For example, the inflation factor. It is worth noting that both U.S. Treasury yields and the implied inflation expectations behind them have shown a rare and significant divergence from oil prices. Historically, oil prices have often been an important anchor for U.S. inflation (expectations) (Figures 1 and 2).

Of course, you might think there is also the risk of service inflation, and the main driver behind this may be immigration, as the direct impact of tariffs is not significant. So far, even the Federal Reserve itself is not very confident about this (Figure 3).

Another example is the Federal Reserve's hawkish turn. From the comparison with policy interest rate expectations, at least after last week's monetary policy meeting, the continued rise in the 10-year U.S. Treasury yield may not be closely related to the Federal Reserve's hawkish turn (Figure 4).

Therefore, the recent continuous rise in U.S. Treasury yields, while certainly influenced by the Federal Reserve's shift, is more closely related to the trading inertia formed in the market over the past few years and the "muscle memory" of the market after the 2016 election.

The exposure of the problem is not far away. The pressure of maturing U.S. Treasuries next year is considerable (approximately $7.8 trillion for the entire year), with the first quarter being particularly concentrated—short-term debt (1 year and below) is about $3 trillion, and medium to long-term U.S. Treasuries are about $550 billion (Figure 5).

One of the core views of the nominated Treasury Secretary Becerra is to correct the excessive issuance of short-term debt by the current Treasury Secretary Yellen. If there is no desire to cause fiscal tightening and bring turmoil in the early days of the administration, the pressure on long-term debt in the first quarter will be greater—already high term premiums may "add fuel to the fire."

Relying on Musk's government efficiency department to help in the short term is clearly unrealistic; meanwhile, the Federal Reserve is "counterproductive"—it is very likely to pause interest rate cuts in the first quarter.

Breaking the deadlock? This process will undoubtedly not be easy. From the experience of recent years, the turning point for U.S. Treasury yields often requires some "turbulent" landmark events—whether it is market turmoil caused by excessively high interest rates (declines in U.S. stocks or institutional failures) or a series of weak economic data, leading to changes in the Federal Reserve's rhetoric and market expectations, a typical example being late October 2023 (Powell's dovish statements amid market turmoil) , and in mid to late April this year (after inflation returns to normal, the Federal Reserve's efforts to stabilize expectations).

After all, the reasons for the Federal Reserve's easing next year are not just economic, but also related to U.S. Treasury bonds and U.S. stocks. Over the past few years, we have also witnessed the Federal Reserve's "repeated zigzag" style.

Author of this article: Shao Xiang from Minsheng Macro (SAC No. S0100524080007), source: Chuan Yue Global Macro, original title: "U.S. Treasury Bonds: The 'First Knife' that Betrayed Trump? (Minsheng Macro Shao Xiang)"

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