Main financial assets discussed:
- U.S. government debt (long-term U.S. treasuries)
Top 3 key points:
1. The U.S. government has proven its ability to transform its fiscal situation and maintain solvency over the long term. It has the flexibility to change revenue and transfer arrangements to maximize efficiency and growth.
2. Wall Street tends to have a myopic view and is often critical of the government, but the U.S. government is the world's largest financial entity and has the confidence of the rest of the world. It is likely to maintain its status as a world reserve currency.
3. Political polarization and bias can compromise decision-making and accuracy in financial analysis. It's important to suspend emotional thinking and political beliefs when evaluating the government as a financial entity.
Recommended actions: **Buy** long-term U.S. treasuries (iShares 20+ Year Treasury Bond ETF) as a proxy for the "stock" of the United States of America. The countercyclical characteristics of these bonds make them a good hedge against stocks, and recent price action suggests that rates will likely reverse recent gains. The U.S. government's ability to adapt and its long-term competitiveness make it a favorable investment. However, there are risks to consider, such as long-term elevated inflation and policy paralysis, which could impact the thesis.
Longer-dated U.S. Treasury yields reach a 10-month high as Wall Street experiences losses and investors grapple with the potential for longer-lasting high interest rates and a struggling Chinese economy.
The yield on the 10-year Treasury bond is rising to its highest level since 2007, and this is due in part to reduced demand from foreign countries, such as Japan and China, who are diversifying their investments away from U.S. Treasurys.
The Chinese bond market is experiencing a significant shift due to concerns over China's economic growth prospects, including a bursting property bubble and lack of government stimulus, leading to potential capital flight and pressure on the yuan, which could result in increased selling of US Treasuries by Chinese banks and a rethink of global growth expectations.
The combined footprint of Japan and China in the US Treasury market is at its lowest on record, leading to speculation that they may sell dollars and liquidate US Treasuries to support their currencies without causing significant market disruption.
US Treasuries are attracting investors despite the possibility of interest rate hikes, as the potential income from high yields outweighs the potential losses from rate increases.
The dollar has reached a five-month high as investors anticipate the need for elevated interest rates due to the strong US economy, with factors such as weak growth in China and Europe, rising US yields, and falling equity prices further supporting the case for dollar strength.
A surge in bond issuance by U.S. investment-grade-rated companies is putting pressure on long-end U.S. Treasuries as investors opt for higher-yielding corporate debt over government bonds.
The US dollar strengthens to a six-month high after data reveals that the services sector unexpectedly picked up steam last month, indicating inflation pressure and suggesting that interest rates will remain elevated for longer.
The U.S. dollar index had its eighth consecutive week of gains, while global stock indexes ended slightly higher before key U.S. inflation data, with concerns that high interest rates may remain in place for longer than expected despite the Federal Reserve likely keeping rates unchanged this month. Longer-dated Treasury yields eased, Apple shares rose slightly after two days of losses, and oil prices increased.
Latin American currencies and stocks are set for their biggest weekly increases in months, benefiting from a stabilizing Chinese economy, rallying commodity prices, and expectations that the Federal Reserve will stop hiking rates.
China has continued to decrease its holdings of US Treasury bills, but there are suggestions that as the rate-hike cycle nears its end, policymakers in Beijing may need to reconsider their decision to unload Treasuries.
BRICS countries are reducing their ties with the U.S. Treasury by selling off Treasury bonds, opting instead for gold, local currencies, and commodities like oil and gas, in order to hedge against U.S. economic policies that may limit the dollar's ability to fund its deficit. Data shows that BRICS has already offloaded $18.9 billion in U.S. Treasury bonds this month, with China leading the way by selling $117.4 billion worth of U.S. government debt this year. Other BRICS members, including Brazil, India, and the UAE, have also decreased their U.S. Treasury holdings. In total, BRICS has removed $122.7 billion worth of U.S. Treasury bonds in 2023.
The selloff in Treasuries has intensified as yields reach multiyear highs on speculation that the Federal Reserve will continue raising interest rates, causing losses for investors and impacting stock valuations.
US 30-year Treasuries yields reach 16-year high as investors demand higher returns for holding long-term debt, while Asian and European equities slump on similar concerns; also, TikTok halts e-commerce in Indonesia, and Netflix plans to increase subscription prices for ad-free streaming.
Yields on U.S. Treasury bonds are rising uncontrollably, causing ripple effects in financial markets, as the 10-year Treasury yield reaches its highest level since August 2007, resulting in plummeting bond prices and impacting various assets such as stocks and gold. The rise in Treasury yields is attributed to factors such as the U.S. government's expanding budget deficit, the Federal Reserve's quantitative tightening program, and its restrictive stance on interest rates.
The slump in US Treasuries has caused a sell-off in emerging-market debt, resulting in the yield on bonds exceeding the earnings yield on stocks, a rare anomaly that historically signifies increased risk.
Long-term yields on Treasuries have reached levels not seen since the global financial crisis, driven by expectations of higher interest rates, strong U.S. economic data, and concerns about inflation, leading to a sell-off in bonds.
China, Brazil, and Saudi Arabia are reducing their US Treasury holdings, with China selling nearly $500 billion in US Treasuries over the past decade.
BRICS countries, including China, Brazil, and Saudi Arabia, sold a total of $17.4 billion in U.S. treasuries in September 2023 to prevent the dollar from rising against local currencies and weakening commodities, such as gold and oil.
China, Brazil, Saudi Arabia, and other countries have been reducing their holdings of US Treasury bonds, potentially indicating a slowdown in their economies or a strategic shift.
Treasuries jumped and shares advanced as comments by Federal Reserve officials suggest that the central bank may not raise rates until the end of the year.
US Treasuries and European bonds rose as investors sought safe havens amid ongoing tensions in the Middle East, while European stocks faltered due to disappointing corporate news and concerns about interest rates and economic stimulus in China.
Investors in U.S. Treasuries are feeling on edge due to news of increased consumer prices and weak demand, suggesting that volatility in the fixed-income markets continues, while lower bond yields reflect a desire for safe assets amidst uncertainty caused by the war in Israel, with concerns of further tightening from the Federal Reserve and mixed economic data from China adding to the market's unease.
A changing buyer base for US Treasuries, including hedge funds, mutual funds, insurers, and pensions, is expected to demand higher premiums and cause more volatility and potential losses in the bond market, which could further impact the US economy already facing recession concerns.
The U.S. dollar reached a one-week high against other currencies following the release of U.S. consumer prices data, which increased expectations for higher interest rates; safe-haven buying also contributed to the dollar's strength due to escalating Middle East conflict.
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