Zheshang Securities: How do you think the 10-year US Treasury interest rate will break 5%?
The Zhitong Finance App learned that Zhishang Securities released a research report saying that the US bond market stabilized in the short term after the implementation of the Federal Reserve's interest rate hike in September, but the problem that caused the rise in US bond yields has not been fundamentally resolved, or the possibility that subsequent US bond yields will continue to rise sharply and that risk will be transmitted to financial markets such as US stocks. The domestic bond market showed resilience in September, and the fourth quarter and New Year's Eve markets are worth looking forward to.
The main views of Zheshang Securities are as follows:
How to understand the FOMC meeting
1) The Federal Reserve raised interest rates as scheduled at the September FOMC meeting, and the relatively hawkish policy signals exceeded market expectations. This conference may be different from the past. For major types of financial assets, raising interest rates is superior to not raising interest rates.
2) On September 17, the Federal Reserve held an FOMC meeting and announced that it would raise the federal funds target interest rate range from 3.50%-3.75% to 3.75%-4.00%. Following the first rate hike since July 2023, the policy operation was in line with market expectations. It is worth noting that this meeting passed with a full vote of 12:0, reflecting to some extent the trend of hawkish voices within the Federal Reserve.
3) Judging from the economic forecast data, compared to the various forecast values at the time of the June meeting, the September meeting showed a predicted economic picture of a stable, moderate and positive economy, a decline in unemployment, and a slight increase in inflation. However, at the federal funds target rate forecast level, the forecast for the September meeting rose further from 3.8% to 4.1%. Considering the 3.75%-4.00% policy interest rate range after the interest rate hike, it indicates that there is still one potential interest rate hike during the year.
4) The bitmap more clearly reflects expectations of potential interest rate hikes. Of the 18 members who made predictions, only 2 believed that the target interest rate range would remain unchanged at 3.75%-4.00% until the end of 2026. 12 thought that interest rates would be raised by 25 BP, and 4 thought that interest rates would be further raised by 50 BP. The relatively positive news is that members of the committee don't think the interest rate hike cycle will last too long. The economic forecast data shows that the 2027 federal funds target interest rate is the same as 2026, at 4.1%. The bitmap also shows that forecasters are basically evenly matched between the 4.00%-4.25% range and the 4.25%-4.50% range.
5) The Federal Reserve has finally begun to raise interest rates. Walsh also made it clear at the press conference that inflation is too high and lasts too long. The latest data shows no signs of a downward trend in potential inflation, and the current financial situation is not restrictive, which forms the core basis for raising interest rates. As for Walsh, it was pointed out earlier that the core was not what he said, but what he did. This time, the Federal Reserve raised interest rates, superimposed the bitmap and the anti-inflation signal that Walsh conveyed, and his hawkish personality may have been corrected to a certain extent.
6) At this meeting, the impact of interest rate hikes on major financial assets may be better than no interest rate hikes. Generally speaking, the Fed's interest rate hike means a tightening of the financial environment, which poses a certain disadvantage for major types of assets such as US stocks, gold, and US bonds. However, this meeting may not be the same as before. Instead, interest rate hikes are a good thing. The core reason is the difference in the underlying driving logic of major asset classes.
7) The rapid rise in US bond yields since August has become the main reason affecting changes in the prices of other assets. At a deeper level, the reason for the continued rise in US bond yields may stem from two major aspects. One is US fiscal discipline and sustainability concerns brought about by the continued expansion of US finances, and the other is monetary discipline concerns about whether the Federal Reserve, represented by Walsh, can maintain independence under pressure from the Trump administration. Walsh's previous “Eagle and Dove” behavior may have caused some damage to monetary discipline, and this time the Fed withstood pressure from the Trump administration to push for interest rate hikes, which may prove that the Fed still maintains a considerable degree of independence. While showing a tough attitude to crack down on inflation and drive down inflation expectations, it is also of positive significance in mitigating the problem of investors demanding higher term premiums due to lack of monetary discipline.
How do you view the subsequent US debt market
1) After the interest rate hike was implemented, the US bond market stabilized in the short term, but the root problem that led to the rise in US bond yields was not properly resolved. The subsequent Fed may also face the dilemma that whether interest rate hikes or not may cause US bond yields to rise. The US bond yield or not ruled out that there is still 50-100 BP upward space, and the risk of contagion to other assets such as US stocks cannot be ignored.
2) Prior to the Federal Reserve meeting, the 10-year US Treasury yield once broke through the 5.00% integer mark, further exacerbating market concerns. After the Federal Reserve raised interest rates as expected, the market chose to temporarily trust Walsh and the Fed's determination to fight inflation and maintain the independence of the Federal Reserve. The yield on US bonds declined significantly, and the risk of short-term US debt may ease somewhat.
3) However, looking at it from a long-term perspective, the fundamental problem with US bonds may not be the Federal Reserve. If long-term issues are not solved, the risk of an upward trend in US bond yields may not be completely ruled out. Under extreme circumstances, 10-year US bond yields may still have potential upward space of 50-100 BP.
4) First, the US treasury may have accumulated and is difficult to recover. Currently, the total amount of US treasury bonds has exceeded 40 trillion US dollars, and the huge amount of debt has also brought a high burden of interest expenses. According to the latest data from the US Treasury Department, as of the first 11 months of the US fiscal year 2026, the US fiscal deficit had reached 1.97 trillion US dollars, and net interest expenses reached 1.02 trillion US dollars, making it the second largest expenditure after social security. Considering that the “big and beautiful” bill promoted by Trump will continue to operate, the pressure on the US fiscal deficit may increase further in the future, and the continued weakening of fiscal discipline forms the core reason for the upward trend in US bond yields.
5) Second, the inflation issue may not be a one-time shock. In the current US-Iran conflict, Iran may be the more dominant party. For the Trump administration, which uses the victory narrative as the main narrative logic, it may now be in a dilemma. If it does not increase the number of troops in the future or it is difficult to form an effective military suppression against Iran, the rising domestic anti-war sentiment or does not support it to expand the scale of military action, and it leaves the market directly behind. This will undoubtedly disguise Iran's dominant position in the Middle East, and will have a negative impact on the Trump administration's subsequent Republican election. Amidst the dilemma of progress and retreat, the problem of mismatch between global crude oil supply and demand persists, and along with the increasing consumption of crude oil reserves in various countries, there may be a wider impact on oil prices in the future. Inflation problems may occur, and there may be a risk of long-term warming.
6) Third, regardless of whether the Federal Reserve chooses to raise interest rates in the future, it may cause US bond yields to continue to rise. If the Fed's interest rate hike is insufficient, and the Middle East issue continues to rise in the long term, or causes the level of inflation to continue to rise and spread further to other industries, then US bond yields may continue to rise due to multiple factors such as fiscal missteps and uncontrolled inflation; if the Fed's interest rate hike exceeds expectations, this rate hike means the beginning of a new cycle of interest rate hikes, then along with the steady increase in the policy interest rate center, there is also a potential path for US bond yields to rise at the same time.
7) Further deduction is that if US bond yields continue to rise, the US stock market, represented by the technology market, may face an impact first. On the one hand, continuing interest rate hikes will further raise risk-free interest rates, putting direct pressure on technology stock valuations. On the other hand, leading technology companies will continue to raise capital through debt issuance and other channels to stay in the arms race in the technology sector. Continued interest rate hikes will significantly increase their financing costs. While impacting their actual business performance, it will also cause investors to further narrow their imagination space for future narratives. Under the reverse “Davis double hit” pressure brought about by continued interest rate hikes, investors' concerns about the bursting of the US technology bubble may intensify and gradually transform into selling behavior, eventually creating a long-term risk situation where US stocks and bonds fall sharply during the expected self-realization process.
China debt fluctuated slowly, and the bull market did not change
1) The domestic bond market “should have declined or not declined” in September further highlighted the resilience of the market. The long-term decline in the debt base constituted a potential benefit. The potential risk of the Fed's interest rate hike to the technology market cannot be ignored. The cost performance ratio of bonds may be further reflected in the bond market in the fourth quarter and New Year's Eve.
2) Under the calendar effect, the bond market has had headwinds for more than 9 months since 2020. The yield on 10-year treasury bonds has only declined slightly in September 2024. All other years, with an average upward margin of close to 9BP, the main drivers include concentrated supply of government bonds, marginal liquidity convergence, and rising expectations for steady growth policies.
3) After experiencing a steady decline in treasury bond yields from late July to late August 2026, market take-profit sentiment increased again. At the same time, considering potential negative disturbances such as calendar effects headwinds, government bond issuance may accelerate, etc., and the bond market may have internal adjustment momentum. At the same time, from the perspective of debt base longevity, the debt base period continued to decline after rising in mid-August. However, looking at the future market, the bond market showed resilience beyond expectations. The 10-year treasury bond yield only rose slightly at the end of August but fell rapidly thereafter, and continued to fluctuate at a low level at other times. The bond market “should have declined without falling” due to multiple shortcomings, or more reflects investors' long trading ideas of increasing positions at a low level. However, when the debt base period falls back, it instead provides more room for a potential lengthening period. In disguise, it became a favorable factor, providing a solid foundation for a potential breakthrough in the bond market in the fourth quarter.
4) Compared to equity bonds, bonds may be more cost-effective. Earlier, through a review of the stock and bond market over the past year, it was suggested that current bonds have returned to the ranks of strong assets. After the Federal Reserve switched to interest rate hikes, the short-term US stock market has recovered, but in the long run, the reverse “Davis double strike” pressure cannot be ignored. Coupled with the current high correlation of global stock markets, if tail risks occur, the safe-haven value of domestic bonds may be further highlighted.
5) Cash yields declined across the board on September 18. The 10-year and 30-year treasury bond yields were close to previous lows, or there was a certain degree of rush trading, reflecting the current rising sentiment in the bond market. Looking ahead to the next stage, we may be more optimistic about the bond market in the fourth quarter. Under multiple potential benefits such as monetary policy easing, further bias in equity and bond prices, and the logical reshaping of asset scarcity, the bond market may be expected to break through the market.
Risk Alerts
Macroeconomic policies or marginal changes that exceed expectations may cause changes in asset pricing logic, causing adjustments in the bond market; institutional behavior is definitely unpredictable, and when institutional behavior converges drastically and forms negative feedback, it may lead to adjustments in the bond market.