After the National Day Holiday, U.S. Treasuries Remain in the ICU: How Does Wall Street View It Now?

Author: Caixin News

As Chinese investors return to the market after the National Day holiday, they undoubtedly find a scene that is almost identical to that before the holiday—namely, that U.S. Treasuries, representing global developed market bonds, continue to face heavy selling pressure...

Market data shows that on Wednesday, as the latest round of global bond sell-offs intensified, the yield on the 10-year U.S. Treasury bond briefly rose to a high of 5.36%, while the yield on the 30-year U.S. Treasury bond reached 5.73%—both hitting their highest levels since 2002. Meanwhile, the benchmark bond yields in France and Italy also surged significantly. The yield on the UK 30-year government bond even reached its highest level since 1998.

When bond prices fall, their yields rise. Although later on Thursday, after the U.S. Treasury auctioned $39 billion worth of 10-year bonds with strong demand, U.S. long-term bond yields retreated in the afternoon session in New York. However, the winning yield from this auction was still as high as 5.3%, marking the highest winning rate for 10-year Treasury bond auctions in the U.S. since November 2000.

On Thursday, the U.S. Treasury will also conduct a $22 billion auction of 30-year bonds, with the issuance yield likely to set a new high since 2000. Subsequently, the U.S. Treasury will also conduct a long bond buyback—potentially repurchasing up to $6 billion of bonds maturing in 20 to 30 years.

It can be said that during this National Day holiday when Chinese investors exited, the global bond market's pressured situation did not see much improvement, but rather revealed more storm centers.

Regarding expectations for Federal Reserve policy, since the September meeting, market expectations for another rate hike by the Fed in October have fluctuated several times. According to LSEG data, the market currently estimates the probability of a rate hike in October at 22%, a significant drop from about 70% at the beginning of last week, although the market still expects several rate hikes over the next year.

With Iran recently increasing attacks on tankers passing through the Strait of Hormuz and driving up oil prices, geopolitics remains a focal point for the global bond market. Brent crude oil has continued to hover around the $100 mark throughout the National Day holiday.

Simon Ballard, Chief Economist at First Abu Dhabi Bank, stated, "Clearly, the shadow cast by the geopolitical landscape, along with the associated price pressures remaining high and government bond yields rising, continues to suppress market sentiment and overall risk appetite."

At the same time, budget negotiations in France and the subsequent nationwide protests have put the European market on edge, making French government bonds the "new storm center" of the global long bond crisis.

Tradeweb data shows that the yield on 10-year French government bonds soared nearly 14 basis points on Wednesday to 4.889%. In comparison, the yield on 10-year German government bonds only rose by 3.3 basis points to 3.507%; the latest yield spread between 10-year French and German bonds is now 139 basis points, once again approaching the nearly 159 basis points peak reached last Friday.

"France is quickly becoming the focus of the European bond sell-off," noted Mitch Reznick, Head of Cross-Border Credit at Federated Hermes Limited, in a report. "The speed of this trend is important, as investors are selling French government bonds in favor of higher-quality German bonds, further widening the yield gap between the two."

How Does Wall Street View the Direction of the Bond Market?

Currently, there is a significant divide among Wall Street strategists regarding whether U.S. Treasury yields will fall sharply by the end of the year or continue to reach new highs.

Representing the bullish camp in the bond market, Goldman Sachs' William Marshall remains firmly optimistic about yields declining. They bet that the market's concerns about high inflation and massive government debt have been overreacted, which is expected to lay the groundwork for a potential rebound in U.S. Treasuries before the end of the year. However, the bearish camp, represented by Barclays Capital's Head of U.S. Rates Research Anshul Pradhan, argues that yields will continue to rise and remain elevated for a long time.

At the same time, this does not mean that either side believes the future trend will be easy to predict.

Currently, numerous uncertainties are clouding the outlook for the bond market: the energy price shocks brought about by the Iran war, the Federal Reserve's shift to a rate hike policy, and the ongoing AI wave that injects strong momentum into the economy... These uncertainties make it increasingly difficult to assess the future direction of the bond market.

Pessimistic Camp

Barclays Capital has raised its forecast for the yield on 10-year U.S. Treasuries in the third quarter of 2027 from 5% to 5.25%, believing there is almost no reason to drive yields lower in the short term.

"As long as the U.S. economy remains resilient, there is currently no specific catalyst to push yields below 5%," Anshul Pradhan, Head of U.S. Rates Research at Barclays Capital, wrote in a recent report. If the U.S. economy remains strong, the yield on 30-year Treasuries could reach 6%.

"The market is currently still digesting a long-term neutral rate of about 3.5%, and we believe that over time, productivity has the potential to exceed expectations. If this happens, the market may reassess this long-term rate level higher. In our view, this would push the 30-year yield to 6% or at least make the fair value of 30-year Treasuries correspond to a 6% yield."

Analysts at Danske Bank also believe that long-term U.S. Treasuries face further pressure risks.

"Pressure is concentrated on the long end of the U.S. Treasury yield curve, not only due to the large supply of U.S. Treasuries but also due to the impact of massive cloud service providers issuing bonds," wrote Jens Peter Sorensen, Chief Analyst at Danske Bank, in a report. "As investors demand higher term premiums on the long end, we do see risks of 10-year and 30-year U.S. Treasury yields touching 6%."

Additionally, Bank of America currently predicts that the yield on 10-year U.S. Treasuries will be at 5% by the end of the year, consistent with the bank economists' judgment on the rate path—that the Federal Reserve will raise rates in the next two meetings in October and December, bringing the economy back to a "balanced" state. However, the team led by Mark Cabana, Co-Head of Global Rates Strategy at Bank of America, has proposed a series of trading recommendations based on the assumption that yields may continue to rise.

He stated, "We believe that it is not yet time to go against the trend. Although our yield forecasts are lower and still based on the benchmark scenario of the U.S. economy, from a risk balance perspective, we believe that the possibility of rates rising is greater than that of falling."

Optimistic Camp

Of course, some market participants currently believe that the long-term bond yields, gradually approaching the 6% mark, may now be attractive enough to drive a rebound in the bond market by the end of the year. The strong auction of 10-year U.S. Treasuries on Wednesday highlighted that some investors are rushing to buy long-term bonds.

Goldman Sachs expects that the yield on 10-year U.S. Treasuries will drop to 4.75% by the end of the year, retreating nearly 60 basis points from Wednesday's peak.

William Marshall, Head of U.S. Rates Strategy at Goldman Sachs, stated, "I believe that our current positive medium-term outlook remains reasonable. Potential inflation pressures have been quite well controlled. The reasons for current high inflation are either issues like tariffs that are mostly in the past or events like Iran's 'ongoing conflict'. Our predicted baseline scenario is that these factors will eventually ease, at which point the market focus will return to more fundamental structural fundamentals."

J.P. Morgan, on the other hand, expects the yield on 10-year U.S. Treasuries to drop to 5.05% by the end of the year, marking the "first return to fair value in six months" for this yield.

Additionally, Morgan Stanley expects the yield on 10-year U.S. Treasuries to fall to 4.8% by the end of the year.

Morgan Stanley rate strategist Martin Tobias pointed out, "The hawkish sentiment currently priced into the market is far more pessimistic than our economic team's probability-weighted expectations for the Fed's path. In comparison, our pessimistic benchmark for 10-year U.S. Treasuries (bearish scenario) is 5.25%, while the spot market has already fully priced in this pessimistic expectation; conversely, the optimistic benchmark corresponding to a deep recession triggered by the global oil crisis (bullish scenario) should see yields drop to 3.8%. Given that the market's forward contracts have effectively priced in bearish expectations, we believe that the risk bias for Treasury yields is more favorable for yields to decline.

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