Summary in Plain Language
Recently, the U.S. financial market has experienced a rare and bizarre phenomenon: traditionally considered safe-haven assets like U.S. Treasury bonds and profitable assets like stocks have both plummeted simultaneously, a situation known in the industry as a “stock-bond sell-off.” This means that whether you invested in stable assets or risky ones, you ended up losing money. The reason behind this is the convergence of three negative factors:
1. The chaos in the Middle East, combined with a significant drop in Saudi Arabia’s oil production, has pushed oil prices to nearly $110 per barrel, reigniting inflation in the U.S., which had already been halved.
2. U.S. Treasury Secretary Janet Yellen promised to spend money to support the bond market, but her efforts were ineffective. Investors no longer trust her ability to stabilize the bond market because she didn’t even spend the allocated budget.
3. Trump made electoral promises, proposing to distribute $5,000 in cash to every adult in the U.S. if the Republicans took control of Congress, at a total cost of $1.2 to $1.3 trillion. This has caused panic, as the U.S. already owes nearly $40 trillion in debt, and adding another trillion would lead to soaring inflation.
These three pressures have pushed the yield on 30-year U.S. Treasury bonds to its highest level in 19 years since 2007, and the yield on 10-year bonds is approaching the psychological threshold of 5%. As a result, the U.S. stock market has declined, affecting investors around the world who hold U.S. dollars.
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Detailed Analysis
Why is a “stock-bond sell-off” more alarming than one of them alone?
The U.S. market usually follows a “seesaw” pattern: when the stock market is rising, people buy stocks for profits, causing bond prices to fall; when the stock market is falling, people seek safety in bonds, driving up bond prices. This means that no matter the market conditions, you can always buy bonds to protect your capital. However, the simultaneous decline of both stocks and bonds indicates that traditional safe-haven strategies have failed. Buying long-term bonds means facing higher interest rates on new issues, while the value of older bonds decreases, resulting in losses. Buying stocks also leads to losses due to rising interest rates and decreased demand. This situation, which is rare in recent years, reflects extreme market panic.
The spike in oil prices to $110 is a major issue, fueling inflation
Oil prices are not just a matter of higher fuel costs; they are the foundation of all commodity prices. When oil gets more expensive, transportation and manufacturing costs rise, leading to increased prices for everything. The latest data shows that factory output prices have increased by 5.4%, far exceeding expectations, with fuel costs being the main driver. Markets had previously expected the Federal Reserve to cut interest rates, but now inflation has rebounded, increasing the likelihood of a rate hike next week from less than 50% to 71%. This shift in expectations has caused panic, as investors expect interest rate hikes rather than rate cuts.
Secretary Yellen’s failed attempt to stabilize the bond market
Yellen promised to buy large amounts of bonds to support the market, but her efforts were inadequate. With over $10 billion in bonds available for sale, she only purchased $5.2 billion, saying the prices were too high. This shows a lack of confidence in her ability to manage the bond market, and investors doubt her ability to control interest rates.
Trump’s election promise has added to the chaos
Trump’s promise to distribute cash to Americans has further exacerbated the situation. While it may seem like a benefit to the public, it could actually harm the bond market. The U.S. already owes nearly $40 trillion in debt, and adding another trillion would increase inflation. Moreover, such a large spending plan would force the Federal Reserve to raise interest rates even more, potentially eroding the value of people’s savings.
The impact of Trump’s policy on the bond market
The market was already worried about the bond market’s stability, and Trump’s promise has only added to this concern. With the Fed’s ability to control inflation limited, any attempt to stabilize the market is unlikely to be successful. Instead, it has led to even more rapid increases in bond yields.
The consequences of Trump’s policy for the economy
If Trump’s plan goes ahead, it would create significant inflationary pressures. The Federal Reserve would have to raise interest rates further, potentially reducing the value of people’s savings. Additionally, the increased demand for dollars could lead to a rise in global inflation, affecting domestic trade and the stock market. Investors are anxious about the future debt levels of the U.S. government and are selling bonds as a precaution.
Why should we pay attention to the 10-year U.S. Treasury bond yield?
The 10-year bond yield is a key indicator for global asset prices. If it crosses the 5% threshold, it would indicate high inflation and could trigger a global financial crisis. Currently, buying 10-year U.S. bonds offers a guaranteed 5% annual return with no risk. Without this option, investors might turn to other assets with lower returns, such as bonds from other countries or risky investments. This would lead to a flow of capital to the U.S., increasing the value of the dollar and putting pressure on other countries’ economies. The inflation data to be released next week will be closely watched; if inflation exceeds expectations and the Fed raises interest rates, the 5% threshold could be quickly breached, causing global market turmoil.