Will the 10-Year US Bond Rate Break 4.34%? What to Expect After the Fed Pauses Interest Rate Hikes

  The volatility of long-term U.S. bond interest rates has been a focus of recent market attention. Can the 10-year U.S. bond rate break through the October 2022 high of 4.34%, and what is the new high? What are the characteristics of the shape of U.S. debt after the Fed pauses interest rate hikes?
  The starting point for this round of U.S. bond interest rate hikes is around May 10, mainly reflecting the resilience of the economy and the mitigation of the impact of the SVB bankruptcy incident. In intraday trading on August 17, the 10-year U.S. bond rate once reached a high of 4.33%. Both 1-year and 2-year U.S. bond rates have broken through the highs before the SVB event-the shorter the term, the more significantly affected by the Fed’s policy rate.
  The latest rise in long-term U.S. bond interest rates is superimposed on the disturbance of U.S. bond supply and demand factors. It is not an increase in interest rate hike expectations, but a delay in interest rate cut expectations. At the beginning of August, the U.S. Treasury Department’s third-quarter refinancing regular meeting updated its financing plan for the second half of the year, significantly increasing the net financing scale and increasing the share of medium- and long-term bond issuance, which triggered a sharp rise in long-term U.S. bond interest rates and narrowed term spreads.
  From experience, it is reasonable for the 10-year U.S. bond rate to return to 4.3%, or even break through the previous high of 4.34%. Because the current market is not fully pricing in the resilience of the subsequent US economy and the end point of the Fed’s interest rate hike. On the one hand, the high of 4.34% in the 10-year U.S. bond interest rate in October 2022 occurred against the background of the Federal Reserve’s three consecutive interest rate hikes of 75BP, but at that time all parties were pessimistic about the U.S. economy. On the other hand, compared with the forecast for the end of the rate hike in September 2022 (range of 450-475BP), the target of the end point of the federal funds rate in 2023 has been raised by 100BP (range of 550-575BP). This also shows that the US bond interest rate at that time was insufficient for pricing the end point of interest rate hikes. Assuming there is no impact from the SVB incident, the 10-year U.S. bond rate may further converge towards 4.34% in March.
  In hindsight, the 10-year U.S. bond rate of 4.34% in October 2022 and 4.1% in March 2023 may not be the “correct” frame of reference. Because both the economic fundamentals and the end point of the Fed’s interest rate hike have clearly exceeded the consensus expectations at the time, but we cannot go back to history to correct mistakes. Therefore, it is not unreasonable for the 10-year U.S. bond interest rate to reach a new high.
  A review of the 10-year U.S. bond yields in the Fed’s 12 interest rate hike cycles since 1958 shows that the high point of this 10-year U.S. bond interest rate appeared “too early”—the market has always been too optimistic about inflation and interest rate cuts, and the Fundamentals are too pessimistic. In both the 1969 and 1974 cases, the highs in the 10-year Treasury rate came after a pause in rate hikes. The implication of these two cases is that when inflationary pressures are trending upward or remain high, the peak of the 10-year U.S. bond rate may lag behind the last rate hike by the Fed.
  Reviewing the history of the US economic cycle and monetary policy in the past 60 years (1959-2020), we will find that in the range where the Fed suspended interest rate hikes, the interest rates of US bonds generally present three patterns: downward trend, upward volatility and high volatility (W-shaped ). Among them, the downward trend dominates. Combining the economic fundamentals at the time and the Fed’s policy stance, it can be seen that inflation is the core contradiction, and financial risk events and the rise in the unemployment rate caused by them are important signals that trigger the inflection point of large-scale assets.
  In the range where the Fed pauses interest rate hikes, when the inflationary pressure is low (or tends to decline), the Fed switches from pausing interest rate hikes to rate cuts relatively quickly, and U.S. bond interest rates show a downward trend (such as 1995, 2000 and 2019); when inflation pressure tends to rise, even if the Fed does not raise interest rates, U.S. bond interest rates may fluctuate upward (such as 1969, 1978-1979, etc.); when there is a certain rebound risk in inflation, When the Fed will keep the interest rate high for a long time, the US bond interest rate may show a high and volatile pattern (such as 2006-2007).
  We can only find answers to current problems in history. A safer and more convenient way is to follow the “Law of Large Numbers”. Therefore, this time, in the range where the Fed has suspended interest rate hikes, empirical views may tend to believe that US bond interest rates are more likely to trend downward. However, we believe that in a limited case study, it is more appropriate to compare the constraints of fundamental conditions and financial conditions on Fed policy, rather than “knowing what and not knowing why”. We believe that the 2006-2007 case may have more reference value for the performance of U.S. bond interest rates in the current round of suspension of interest rate hikes.

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