Rising US Long-Term Treasury Yields: A Structural Problem Beyond Besant's Influence

Analysis suggests that the Treasury's bond buyback measures will ultimately be insufficient to lower bond yields. The bond yield issue is one that the Federal Reserve, not the Treasury, should address. However, the measures are deemed meaningful for stabilizing the bond market and controlling the pace of yield increases.

The unprecedented speed and near-vertical interest rate hikes by Chair Powell in 2022 were cited as triggering the Silicon Valley Bank crisis and the UK financial sector turmoil. The experience highlighted the importance of risk management to prevent a recurrence of similar situations, as the rapid rate increases at the time led to maturity mismatches and market failures.

It was argued that the rise in US long-term bond yields is not merely due to economic prosperity but also because the attractiveness of assets guaranteed by the US government is structurally declining. In this environment, gold and Bitcoin are emerging as alternative assets, drawing significant market attention.

It was explained that changes are occurring in all three major components of bond yields: expected inflation, real interest rates, and term premium. The term premium represents compensation for long-term investment risk, and the simultaneous change in these three factors emphasizes that bond yields are structurally increasing, not just a temporary phenomenon.

Analysis suggests that the era of downward-stabilizing prices, which lasted for 40 years since the 1980s, is coming to an end. The trend of deglobalization is leading countries to handle the entire production process, fostering high-cost value chains. This increases production costs in developed nations, intensifying overall inflationary pressures.

It was pointed out that factors that created low inflation have completely reversed, intensifying inflationary pressures. Geopolitical risks are escalating, increasing sensitivity to raw material prices. Furthermore, the labor shortage due to the retirement of the Baby Boomer generation is worsening. Concurrently, the need for large-scale infrastructure reconstruction and replacement cycles for AI and energy transition are acting as factors that increase overall production costs and demand.

Analysis suggests that the 'debasement trade,' a strategy of betting on currency devaluation, is making a comeback. This is attributed to the peculiar phenomenon of US Treasury yields rising despite interest rate cuts, reflecting concerns about the US government's continuous issuance of Treasury bonds.

An paradoxical phenomenon occurred where bond yields actually rose immediately after the interest rate cut in September 2024. Market participants are concerned about additional Treasury issuance and deepening fiscal instability, which is further reducing the attractiveness of US government-guaranteed assets.

According to Ray Dalio's 'Long-Term Debt Cycle' theory, each repetition of the short-term debt cycle, driven by the Fed's liquidity provision and debt assumption during economic downturns, leads to a continuous increase in total debt. The theory explains the current economic and global order crises through the flow of debt, suggesting that this cycle is nearing its end.

The simultaneous rise in long-term bond yields and currency depreciation is interpreted as a warning sign that confidence in assets guaranteed by the hegemon nation is starting to erode. It was warned that if central governments demand central banks purchase bonds to manage debt, and the Fed acquires the debt, the market would react negatively, accelerating the risks of a long-term debt cycle.

Significant changes are observed in the asset portfolios of non-US central banks. Unlike in the past, an era has arrived where gold is held more than US bonds, clearly demonstrating that gold is the primary beneficiary asset of the debasement trade.

It was explained that, unlike in the past, Bitcoin is showing a tendency to synchronize with gold, which is closely related to the debasement trade. Bitcoin is rising amidst the 'Sell America' phenomenon, and a new structure is forming where the Nasdaq rebound, in particular, is driving Bitcoin's ascent.

It was pointed out that Bitcoin possesses a mixture of 'digital gold' and 'growth stock' characteristics, making its fundamental nature difficult to ascertain. While Bitcoin's price movements can be predicted when various layers—macro environmental changes, fundamentals, and sentiment—align, there are also periods when past character changes, which were once accurate, now fall out of sync.

It was analyzed that Besant's remarks yesterday likely served as a signal to the market, rather than an intention to actually buy bonds from the TGA to boost bond prices through supply and demand. Considering Besant's relationship with the Fed Chair, including their shared alma mater and appointment process, it is notable that any mention of market intervention by the Fed would have a significant price impact.

It is unlikely that the Fed Chair, speaking at the Jackson Hole Meeting, will unilaterally mention market interventions such as bond purchases. The Chair has maintained a traditional Fed persona since taking office, and given that the meeting's theme is payment systems, conservative and neutral remarks are expected.

If routine remarks are made at the Jackson Hole Meeting, the market expects bond yields to again face upward pressure. While currently fluctuating around 5.2%, yields are likely to rise again towards 5.3%.

It was noted that Besant's credibility is low due to numerous past errors in predictions regarding tariffs and oil prices. The current rise in bond yields is a structural problem, making it difficult to resolve through his remarks or interventions by the Treasury and the Fed alone. Such interventions, it was added, could even accelerate the long-term debt cycle.