Global markets exhibited a pattern of 'gold rising, everything else falling' yesterday, indicating that capital has not truly embraced risk assets, and the market is in a 'half-skeptical' state under the dual uncertainties of 'trade + fiscal policies.'
First, the U.S. dollar, U.S. stocks, and U.S. Treasury bonds are all declining simultaneously—the dollar is about to fall below the 100 level, and the yield on 10-year Treasury bonds is about to break through the 4.5% alert level, signaling danger in the market.
Second, the turning point for the market occurred between 21:00 and 22:00 Beijing time, as U.S. investors began to sell off right after the market opened, resembling a delayed reaction to Moody's downgrade of the U.S. rating (the market's pricing of U.S. sovereign credit risk has clearly risen).
Third, while the U.S. stock market is worry-free, a larger problem has shifted to the U.S. Treasury market.
Yesterday, Bloomberg reported that Hong Kong's Mandatory Provident Fund may be forced to sell off its holdings of U.S. Treasury bonds. According to Hong Kong's exceptionally strict investment regulations, the MPF can only invest more than 10% of its assets in U.S. Treasury bonds when they have been awarded a AAA rating or equivalent by recognized rating agencies in the U.S. In other words, the U.S. has lost its AAA rating and no longer meets the investment criteria of Hong Kong's MPF. Long-term foreign capital (especially from China) has significantly slowed its increase in U.S. Treasury holdings, and the downward adjustment of credit ratings has resulted in both passive selling pressure and active risk avoidance. If institutions like Hong Kong's MPF are forced to sell, it could further amplify the severe fluctuations in short-term interest rates and the yield curve.
In addition, the market's bearish sentiment towards U.S. Treasury bonds has intensified—traders are betting that the yield on 10-year Treasury bonds will soar to 5%, a level that could trigger a sell-off in U.S. stocks. Data from the Chicago Mercantile Exchange on Monday confirmed that as much as $11 million is betting that the 10-year yield will rise to 5%.
Last night, Federal Reserve officials also rarely acknowledged the risks facing the U.S. Treasury market. Atlanta Fed President Bostic stated that volatility in the Treasury market could increase uncertainty. The Fed's public expression of concern about the Treasury market is not merely to 'scare the market,' but rather a responsibility and communication strategy to let the market know what the Fed is 'thinking and worrying about,' thus avoiding severe market mismatches when policy shifts occur.
The market is currently in a phase of probing and repricing, closely monitoring the progress of the U.S. Congress on the 'Trump Tax Reform Act,' as any changes in detail could instantly ignite the market.
