Observation of assets after the US interest rate cut
On October 7, 2024, the 10-year U.S. Treasury yield broke through the 4% mark for the first time since July 31; it closed at 4.08% on October 11, having risen by a total of 43 basis points since the Federal Reserve's rate cut on September 18.
Why has the U.S. Treasury yield risen sharply? Firstly, since late September, market expectations for rate cuts have been revised upwards, driven by the Federal Reserve's active guidance and objectively stronger economic data. Secondly, implied inflation expectations in U.S. Treasuries have risen, successively driven by strikes, wage increases, oil price rebounds, and the latest CPI data being stronger than expected. Thirdly, the U.S. debt scale has increased to a new level after October 1 of the new fiscal year, with a phase increase in U.S. Treasury supply, which has lifted U.S. Treasury yields. Fourthly, the rapid decline in the scale of Federal Reserve reserves, that is, the tight liquidity in the banking system, may also contribute to the rise in U.S. Treasury yields. Looking ahead, we expect the 10-year U.S. Treasury yield to remain at a relatively high level of around 4% in the next 1-2 months. In terms of economic fundamentals, the U.S. economy and employment are expected to maintain a certain level of resilience, coupled with the risk of rising inflation in the fourth quarter, the market's expected rate cut path is relatively reasonable after correction, that is, it is expected that the Federal Reserve will conduct two more 25BP rate cuts within the year, steadily advancing the "calibration" of interest rates. In terms of liquidity, it is expected that before the Federal Reserve suspends the balance sheet reduction, the liquidity environment of the U.S. banking system will remain tight and provide certain support for U.S. Treasury yields.
Impact on Chinese assets. Against the backdrop of the recent rapid rise in the valuation of Chinese assets, the rebound in U.S. Treasury yields may exacerbate the price volatility of Chinese-related stocks, but it will not change the overall direction of global funds "re-allocating" to Chinese assets. On the one hand, the valuation pressure on Chinese-related stocks has increased recently, and the rebound in U.S. Treasury yields may increase this pressure. Taking Hong Kong stocks as an example, from September 17 to October 10, the risk premium (relative to U.S. Treasuries) of the Hang Seng Index fell from 8.1% to 5.6%, which has fallen below the "dangerous level". On the other hand, the correlation between Chinese-related stocks and the 10-year U.S. Treasury yield has weakened this year, and the performance of Chinese assets depends more on "internal factors" rather than "external factors". Driven by "internal factors", the global funds "re-allocation" to Chinese assets has begun, and there is still room for future development.
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Impact on major asset classes. 1. Will U.S. technology stocks once again become a "safe haven"? The recent rebound in U.S. Treasury yields is "more harm than good" for the overall U.S. stock market, and technology stocks may be relatively more "resistant to falls" than cyclical stocks, but it is difficult to rise strongly like in the first four months of this year. 2. Will gold be suppressed by the rise in U.S. Treasury yields? The rise in U.S. Treasury yields (especially real yields) will more or less put pressure on gold prices. Since the beginning of this year, the 30-day rolling correlation coefficient between the spot price of gold and the 10-year U.S. Treasury real yield has been negative on 79% of trading days. 3. How well can the euro, yen, and renminbi resist the widening of interest rate differentials? We believe that the yen is currently the most susceptible to the impact of the rebound in U.S. Treasury yields, followed by the euro, and the renminbi has the strongest ability to resist the widening of interest rate differentials. As of October 10, the 30-day rolling correlation coefficient between the yen, euro, and renminbi exchange rates against the U.S. dollar, and the interest rate differentials between 10-year domestic and U.S. Treasury bonds, were 0.93, 0.59, and -0.22, respectively. In China, the relatively high U.S. Treasury yields may increase the difficulty and space for the renminbi to further appreciate, but thanks to strong economic policy support, international funds have regained confidence in renminbi assets, which is expected to keep the renminbi relatively independent.
Risk warnings: The U.S. employment and economy may decline more than expected, the pace of Federal Reserve rate cuts is uncertain, and global geopolitical risks may rise more than expected.
On October 7, 2024, the 10-year U.S. Treasury yield broke through the 4% mark for the first time since July 31; it closed at 4.08% on October 11, having risen by a total of 43 basis points since the Federal Reserve's rate cut on September 18. The sharp rebound in U.S. Treasury yields, on the one hand, reflects the market's upward revision of the interest rate path, driven by factors such as Federal Reserve guidance, stronger economic data, and rising inflation concerns; on the other hand, it is also driven by factors such as increased U.S. Treasury issuance in the new fiscal year and the decline in Federal Reserve reserve levels.
Looking ahead for a period of time, we judge that: 1) The relatively high U.S. Treasury yields may increase the price volatility of Chinese-related stocks, but will not change the overall direction of capital flowing back to Chinese assets; 2) U.S. technology stocks may not be as perfectly resistant to the impact of rising U.S. Treasury yields as they were from January to April this year; 3) Gold prices will be more or less under pressure, and factors outside the U.S. dollar system are not entirely favorable for gold; 4) The yen exchange rate may be more susceptible to shocks, while the renminbi exchange rate may have a strong ability to resist the widening of interest rate differentials.