Driven by the continued rise in the 10-year Treasury bond yield above 4.8%, the US Dollar Index reached a level of 107 in early October. Subsequently, the latest employment and inflation data released by the United States were stronger than expected. However, the 10-year U.S. Treasury bond yield climbed almost 0.5% in less than 10 trading days after a brief fall, once exceeding 5%, and the 2-year Treasury bond yield was even closer to 5.3%. However, the US dollar did not benefit from this wave of rising bond interest rates, and instead continued to retreat from 107. At the same time, some Federal Reserve officials hinted that the rapid rise in bond interest rates is equivalent to the effect of one interest rate hike. It may not be necessary to raise the federal funds rate again, and they must pay attention to the impact on the financial market.

The U.S. Treasury Secretary continues to express optimism about the economic outlook, and coupled with the possibility of a rebound in inflation, U.S. interest rates will remain high for longer than previously expected. Relative to the situation in other major economies, there is still advantages for the U.S. dollar. At the time of writing (24/10), the U.S. dollar index fell back to a low of 105, which is near the 50-day moving average. This support level should not be lost, otherwise the technical trend may take a turn for the worse.

U.S. Treasury bond interest rates have risen, and the market generally estimates that they have not yet reached a peak. This is mainly because the United States needs to increase debt issuance to meet huge expenditures. Take geopolitics as an example. There is the Russia-Ukraine war that lasted for almost two years, and the recent conflict between Israel and Kazakhstan that just broke out. The United States needs to spend money and strength to support its allies. However, the momentum of global de-dollarization for USD shows signs of accelerating. In particular, the deterioration of Sino-US relations has made China more interested in reducing its holdings of US debt, and the demand side will continue to decline.

On the other hand, the normalization of the Federal Reserve's monetary policy is still in progress, and the reduction of its balance sheet will further increase the supply of the bond market. Coupled with the continued risk of a downgrade in the U.S. government's credit rating, long-term bond investors will demand higher returns. It should be noted that high long-term debt interest rates may become the norm, which will not only increase the interest expenses of the U.S. government, but it will also create adverse cost pressures on local corporate financing, and a serious impact on the real estate market will be caused. Recently, new home sales have been obviously affected. Therefore, whether the U.S. economy can maintain good development still requires attention. In next year’s presidential election, we won’t see any capable new faces for the time being. If Biden and Trump are still elected, the fight between the two parties will only become more serious, which will definitely be detrimental to the economic development of the United States.

Patrick Law

Chief Operating Officer of Hantec Group