If we could turn back the clock to three months ago, no one would have imagined that the U.S. inflation, which had already plummeted to 3%, would experience a sustained rebound. What's even more unexpected is that the number of buyers for U.S. Treasury bonds, known as the "global asset pricing anchor," is dwindling.
Are fewer people buying U.S. Treasury bonds?
U.S. inflation has rebounded for three consecutive months, greatly exceeding market expectations.
Yesterday, we discussed that after the release of the U.S. PPI index, it greatly exceeded expectations. The U.S. industrial commodity price index showed an unexpected increase, which is seen as a sign of the U.S. inflation recovery.
As expected, the U.S. CPI data released in the early hours today also showed that U.S. inflation continued its previous recovery trend, maintaining an inflation rate of 3.7%. This exceeded the market's expectation of 3.6%.
U.S. inflation has shown a continuous three-month recovery.
However, it's important to note that this is the result after the Federal Reserve has raised interest rates more than a dozen times, and the U.S. still maintains a federal funds rate of 5.25%-5.5%. Under such high interest rates, U.S. inflation can still maintain a rebound for three consecutive months, which is already a very alarming situation, indicating that U.S. inflation is not so easy to resolve.
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So, why is the U.S. inflation still relatively high this time? The main reasons are still the rising energy prices and U.S. housing prices.
Firstly, the joint announcement of production cuts by Saudi Arabia and Russia in September led to a significant increase in international oil prices in September, affecting gasoline prices in the U.S., increasing the cost of goods and logistics, reducing consumer purchasing power, and exacerbating the inflation crisis.
Secondly, the longstanding issue of real estate, which caused the U.S. to experience a subprime mortgage crisis in 2008, is still a problem. In September, U.S. housing prices soared by 7.2% year-on-year, leading to stubborn core inflation in the U.S., which could also be the straw that breaks the camel's back in triggering a U.S. inflation crisis.Inflation crisis is severe, US housing prices soar by 7.2%
To be honest, if the inflation data were not too bad, then after the Federal Reserve announced a pause in interest rate hikes in November, the probability of a rate hike in December would not be very high either. After all, the current US Treasury yield of around 5% has already put the US banking industry, the US financial system, and the real estate market under tremendous pressure.
However, the US inflation has exceeded expectations now, with both CPI and PPI indices performing poorly, and even the core inflation rate is very high. This has led to the need for the US to tighten monetary policy, with the probability of a rate hike in December rising to 50% from before. Next month, there is a 50% chance that the US will continue to raise interest rates.
The chief economist of a certain institution also said that the stubborn inflation in the US still exists. The Federal Reserve wants to completely solve the inflation crisis, and can only maintain monetary tightening for a considerable period of time in the future.
However, does the Federal Reserve really only need to keep raising interest rates? In fact, the US Treasury has already shown a "refusal" situation.
US Treasury crisis! No one is buying Treasury bonds anymore?
The US Treasury market reflects the supply and demand of US Treasury bonds, and the price and yield of Treasury bonds are actually subject to the policy expectations of the Federal Reserve and the inflation situation in the United States.
Therefore, after the "black swan" event in the September CPI data, the US Treasury market has once again stirred up a "bloodbath".
After the data was announced, the US Treasury yield continued to rise, and the price of Treasury bonds plummeted. The yield on 2-year US Treasury bonds rose to 5%, and the US stock market fell under pressure, leading to a significant opening pressure in the A-share market today.
The yield on 2-year US Treasury bonds has risen to 5%.The poor performance of the U.S. Treasury bond market, coupled with domestic political turmoil in the United States, the upcoming elections, and the severe debt crisis, has led to an increasing number of market investors losing trust in U.S. Treasury bonds. In particular, the 30-year U.S. Treasury bond has seen a record low acceptance rate since 2007, with a $20 billion 30-year U.S. Treasury bond being awarded at an interest rate of 4.837%, nearly 50 basis points higher than the previous rate. The proportion of direct purchasers of U.S. Treasury bonds is only 16.7%, with the rest being bought by entities including the Federal Reserve, U.S. government-affiliated units, and companies.
The number of buyers for the 30-year U.S. Treasury bond is decreasing. The reduction in market subscriptions and weak demand for U.S. Treasury bonds has also forced the U.S. Treasury to increase yields to attract investors, leading to a significant drop in prices. The safety of U.S. debt is once again being questioned by the market.
While this may sound complex, in simple terms, the market believes that the U.S. government has made a mess of the economy and is continuously issuing long-term, large amounts of debt, leading to a lack of trust in the Federal Reserve and U.S. Treasury bonds.
As a result, the number of global investors buying U.S. Treasury bonds is decreasing. On the Chinese side, there has been a continuous selling of U.S. Treasury bonds, with nearly $400 billion worth sold in the past two years. As long as Sino-American relations remain tense, selling U.S. Treasury bonds to buy gold and adjust China's foreign exchange reserves to ensure the security of Chinese assets will be a major trend.
In fact, apart from China, more and more countries are recognizing the increasing uncertainty of U.S. Treasury bonds. Everyone has started selling gold and U.S. Treasury bonds, and developing countries are beginning to de-dollarize. This is due to the U.S. government's abuse of the dollar hegemony, indiscriminate issuance of U.S. Treasury bonds, and the use of dollar tides to harvest the world, causing the global economy to be in a mess.
So, it's not that everyone doesn't want to use dollars or buy U.S. Treasury bonds. Look at what the Federal Reserve has done, look at the continuous indiscriminate issuance of dollars by the U.S. government, and look at the global financial crises they have shifted and the recent inflation crisis they have triggered. It is the unwillingness of countries to be continuously harvested by the United States that leads them to think about de-dollarization and unite with more countries to protect themselves.
Stubborn U.S. inflation is difficult to resolve in the future. It is foreseeable that even next month, the United States will not have an easy time. The biggest black swan event in October is the energy crisis triggered by the conflict between Palestine and Israel.The inflation crisis of this month is largely due to the rise in energy prices. The Israel-Palestine conflict has only just begun, and given Israel's attitude, it is very likely to launch an "unprecedented" ground war against Palestine.
The Israel-Palestine conflict has only just begun, and it is highly probable that it will "escalate" in the future.
Once the scale of the war escalates, it only needs to involve one oil-producing country, or even just involve Iran and block the Strait of Hormuz, and global oil prices will soar. Moreover, the room for price increases will be very large, which will lead to international oil prices, currently at $80 a barrel, opening up a very large room for price increases.
In this case, the inflation in the United States will not only fail to continue to decrease, but it will be a relief if it can maintain the current level of inflation without further increasing. The stubborn disease of inflation will continue to plague the United States.
Summary
In summary, the sudden "black swan" of U.S. inflation has led to the continued upgrading of the Federal Reserve's future interest rate hike expectations, a surge in U.S. Treasury bond yields, and turmoil in the financial market.
For the safest asset, U.S. Treasury bonds, more and more investors have also voted with their feet, expressing their distrust of U.S. Treasury bonds, which can be seen from the over-subscription probability of Treasury bond issuance.
In fact, the decline of the United States to its current state is not due to any other reason, but purely because there was too much money printing during the Trump era three years ago, and the billionaires on Wall Street seized most of the wealth, with their wealth growth exceeding the past. But in the end, it is still the majority of the middle and lower classes of the American people who suffer. The abuse of budgets and deficits by the U.S. government has also limited the future growth space of the U.S. economy.
So, the final difficult problem is still left to the Federal Reserve and the U.S. Treasury: how to balance U.S. debt and fiscal deficits? How to maintain the credibility of U.S. Treasury bonds? How to avoid more countries selling U.S. bonds? These difficult problems are enough for Powell and Yellen to drink a pot.