《Dr. Donald Tao's World》Global long-term bond markets have seen panic selling, with U.S. 10-year Treasury yields jumping 22 basis points within a week and 30-year yields rising 23 basis points. The U.S. Treasury's market intervention has again been lukewarm, emboldening speculators to short-sell aggressively, causing consecutive plunges in 30-year bond prices of the U.S., Japan, France, the U.K., and Germany. Markets have deepened their expectations of the U.S. Federal Reserve's higher-for-longer interest rate hikes, pushing up the dollar index. Stock markets, however, reacted surprisingly calmly, with U.S. equities leading most global markets higher. Crude oil prices saw profit-taking, while gold and silver lost their safe-haven appeal and weakened along with liquidity.
U.S. President Trump loves to boast that the U.S. economy is the "hottest economy in the world." This time, he finally got his wish—economic data are indeed strong, but bond markets have consequently collapsed. The yield on U.S. 10-year Treasury bonds has broken through the psychological barrier of 5.2%, while the 30-year bond yield has climbed beyond 5.5%, reaching the highest level since 2004; the average U.S. 30-year fixed mortgage rate has surged to 7.45%. In the author's view, bond markets are now in full alarm.
The direct trigger for the latest long-bond sell-off is high consumer confidence and composite PMI indices, indicating that the economy continues to expand with no sign of recession in sight. Markets believe the Fed needs a longer hiking cycle and higher policy rates. At the recently concluded FOMC meeting, policymakers projected one more 25-basis-point hike this year, but bond markets have turned more pessimistic, with interest rate futures now pricing in three additional hikes totaling 75 basis points over the next year.
Strong economic activity is not exactly news. The Atlanta Fed's GDPNow model previously forecasted a robust 5% U.S. GDP growth in the third quarter, showing the economy has not truly slowed. Looking deeper, the U.S. economy is in a K-shaped development: consumers invested in AI stocks spend freely, while middle- and low-income households without stock market exposure struggle with rising living costs. Investment across most U.S. industries remains subpar, but capital spending related to AI is not only massive but accelerating.
Compared to economic activity, inflation is more worrisome. Prices have not spiraled out of control, but their decline has been slower than expected. With a new Fed chair committed to bringing inflation back to target, amid high oil prices, insufficient fuel production, and no end in sight to the U.S.-Iran conflict, policy rates remain highly uncertain. More importantly, liquidity flows have reversed.
For most of the period since 2008, quantitative easing kept the economy awash in excess liquidity, with low funding costs, corporate stock buybacks, and financial institutions eager to leverage. But now everything has changed. With fiscal policy out of control, government bond issuance pressure is immense and borrowing costs are rising. Coinciding with large-scale bond issuance by AI companies, the supply-demand balance in long-term bond markets has been disrupted, and overseas appetite for buying U.S. Treasuries has rapidly cooled. Major central banks, led by the Fed, have shifted from QE to QT, tightening monetary policy.
Bond markets are highly volatile, but the author currently sees no specific catalyst triggering a liquidity chain reaction. However, the undeniable fact is that financial conditions are clearly deteriorating. Mortgage rates breaking higher, competition between government bonds and AI for funding, uncooperative central bank policies, and uncontrolled energy prices make the $32 trillion U.S. Treasury market resemble a gas station full of fumes—just one spark could trigger a chain explosion.
U.S. stock markets have reacted indifferently to the bond sell-off, even rising last week. The stock rally is mainly driven by tech stocks, especially AI-related ones, which are far less sensitive to interest rate environments than cyclical stocks. Most companies also have solid earnings outlooks, making the decoupling of stocks and bonds somewhat understandable. However, AI infrastructure companies are burning cash at an alarming rate, with capital expenditures expected to reach $2 trillion next year, far exceeding what free cash flow can support. AI bonds competing with government bonds for funding exacerbate liquidity shortages.
It's not just U.S. bonds suffering. French, British, German, Italian, and Japanese bonds are also being sold off simultaneously, as investors clearly expect higher yields. European countries face structural economic decline, inability to shrink fiscal deficits, and political instability. In the author's view, France and the U.K. could even face debt crises. Bond markets are globally interconnected, central bank policies are relatively synchronized, and market sentiment is contagious.
It has been seven months since the U.S. and Israel launched military attacks on Iran. International crude oil prices have rollercoasted, rising substantially overall, yet the impact on global economic growth has been smaller than economists, including the author, had predicted. According to calculations by independent consultancy Capital Economics, global economic growth in the second quarter of this year was essentially unchanged compared to a year earlier, with the main impact reflected in prices. U.S. crude exports have filled part of the gap, China has sharply reduced oil imports, and more Russian oil has entered circulation, preventing a full-blown oil crisis.
However, a fuel crisis may erupt in the coming months. U.S. diesel prices have hit a record high of $6.53 per gallon, rising much faster than gasoline prices. Trump suggested last week restricting diesel exports, although the White House denied any immediate plans. Given diesel's significant impact on agriculture, transportation, and heating, such talk ahead of midterm elections is unlikely to be baseless.
Middle East conflicts and the Russia-Ukraine war have not only weakened crude oil production and transportation but also severely damaged key petrochemical and refining facilities in the region. According to the International Energy Agency, 40 to 80 critical energy facilities across nine Middle Eastern countries have been severely damaged. In recent months, 28 of Russia's 32 largest refineries have been hit by Ukrainian drone attacks, with 30% to 45% of refining capacity paralyzed. Restoring normal refinery operations typically takes at least a year—fuel crisis is quietly arriving.
Diesel, aviation fuel, naphtha, liquefied gas, along with synthetic ammonia and nitrogen fertilizers, will be hit first. Shortages of these essential goods will create serious supply gaps this winter. For developed countries, this means higher prices; for developing countries, it could mean supply disruptions and potentially impact agricultural production.
This week's focus is on two U.S. data points: 1) August PCE, forecasted to rise 0.4% month-on-month and 3.7% year-on-year; core PCE forecasted to rise 0.3% month-on-month and 3.3% year-on-year. Persistently high inflation adds pressure on the Fed to hike rates in October. 2) September non-farm payrolls, expected to add 90,000 jobs (previous: 162,000); average hourly earnings forecasted to rise 0.3%, same as prior. Also watch ECB President Lagarde's speech at the European Parliament, the Bank of Japan's September meeting minutes, and Eurozone PMI.
Watch the video now: https://youtu.be/tK1hDMUzViE
《Dr. Donald Tao》
*This week's column reflects the author's understanding and views on the economy, policy, and markets. It is personal opinion and not investment advice or solicitation.
*Articles published in "Economic Channel," whether signed or unsigned, represent the authors' personal opinions and do not reflect the stance of "Economic Channel," which serves merely as a platform for free expression.
U.S. President Trump loves to boast that the U.S. economy is the "hottest economy in the world." This time, he finally got his wish—economic data are indeed strong, but bond markets have consequently collapsed. The yield on U.S. 10-year Treasury bonds has broken through the psychological barrier of 5.2%, while the 30-year bond yield has climbed beyond 5.5%, reaching the highest level since 2004; the average U.S. 30-year fixed mortgage rate has surged to 7.45%. In the author's view, bond markets are now in full alarm.
The direct trigger for the latest long-bond sell-off is high consumer confidence and composite PMI indices, indicating that the economy continues to expand with no sign of recession in sight. Markets believe the Fed needs a longer hiking cycle and higher policy rates. At the recently concluded FOMC meeting, policymakers projected one more 25-basis-point hike this year, but bond markets have turned more pessimistic, with interest rate futures now pricing in three additional hikes totaling 75 basis points over the next year.
Strong economic activity is not exactly news. The Atlanta Fed's GDPNow model previously forecasted a robust 5% U.S. GDP growth in the third quarter, showing the economy has not truly slowed. Looking deeper, the U.S. economy is in a K-shaped development: consumers invested in AI stocks spend freely, while middle- and low-income households without stock market exposure struggle with rising living costs. Investment across most U.S. industries remains subpar, but capital spending related to AI is not only massive but accelerating.
Compared to economic activity, inflation is more worrisome. Prices have not spiraled out of control, but their decline has been slower than expected. With a new Fed chair committed to bringing inflation back to target, amid high oil prices, insufficient fuel production, and no end in sight to the U.S.-Iran conflict, policy rates remain highly uncertain. More importantly, liquidity flows have reversed.
For most of the period since 2008, quantitative easing kept the economy awash in excess liquidity, with low funding costs, corporate stock buybacks, and financial institutions eager to leverage. But now everything has changed. With fiscal policy out of control, government bond issuance pressure is immense and borrowing costs are rising. Coinciding with large-scale bond issuance by AI companies, the supply-demand balance in long-term bond markets has been disrupted, and overseas appetite for buying U.S. Treasuries has rapidly cooled. Major central banks, led by the Fed, have shifted from QE to QT, tightening monetary policy.
Bond markets are highly volatile, but the author currently sees no specific catalyst triggering a liquidity chain reaction. However, the undeniable fact is that financial conditions are clearly deteriorating. Mortgage rates breaking higher, competition between government bonds and AI for funding, uncooperative central bank policies, and uncontrolled energy prices make the $32 trillion U.S. Treasury market resemble a gas station full of fumes—just one spark could trigger a chain explosion.
U.S. stock markets have reacted indifferently to the bond sell-off, even rising last week. The stock rally is mainly driven by tech stocks, especially AI-related ones, which are far less sensitive to interest rate environments than cyclical stocks. Most companies also have solid earnings outlooks, making the decoupling of stocks and bonds somewhat understandable. However, AI infrastructure companies are burning cash at an alarming rate, with capital expenditures expected to reach $2 trillion next year, far exceeding what free cash flow can support. AI bonds competing with government bonds for funding exacerbate liquidity shortages.
It's not just U.S. bonds suffering. French, British, German, Italian, and Japanese bonds are also being sold off simultaneously, as investors clearly expect higher yields. European countries face structural economic decline, inability to shrink fiscal deficits, and political instability. In the author's view, France and the U.K. could even face debt crises. Bond markets are globally interconnected, central bank policies are relatively synchronized, and market sentiment is contagious.
It has been seven months since the U.S. and Israel launched military attacks on Iran. International crude oil prices have rollercoasted, rising substantially overall, yet the impact on global economic growth has been smaller than economists, including the author, had predicted. According to calculations by independent consultancy Capital Economics, global economic growth in the second quarter of this year was essentially unchanged compared to a year earlier, with the main impact reflected in prices. U.S. crude exports have filled part of the gap, China has sharply reduced oil imports, and more Russian oil has entered circulation, preventing a full-blown oil crisis.
However, a fuel crisis may erupt in the coming months. U.S. diesel prices have hit a record high of $6.53 per gallon, rising much faster than gasoline prices. Trump suggested last week restricting diesel exports, although the White House denied any immediate plans. Given diesel's significant impact on agriculture, transportation, and heating, such talk ahead of midterm elections is unlikely to be baseless.
Middle East conflicts and the Russia-Ukraine war have not only weakened crude oil production and transportation but also severely damaged key petrochemical and refining facilities in the region. According to the International Energy Agency, 40 to 80 critical energy facilities across nine Middle Eastern countries have been severely damaged. In recent months, 28 of Russia's 32 largest refineries have been hit by Ukrainian drone attacks, with 30% to 45% of refining capacity paralyzed. Restoring normal refinery operations typically takes at least a year—fuel crisis is quietly arriving.
Diesel, aviation fuel, naphtha, liquefied gas, along with synthetic ammonia and nitrogen fertilizers, will be hit first. Shortages of these essential goods will create serious supply gaps this winter. For developed countries, this means higher prices; for developing countries, it could mean supply disruptions and potentially impact agricultural production.
This week's focus is on two U.S. data points: 1) August PCE, forecasted to rise 0.4% month-on-month and 3.7% year-on-year; core PCE forecasted to rise 0.3% month-on-month and 3.3% year-on-year. Persistently high inflation adds pressure on the Fed to hike rates in October. 2) September non-farm payrolls, expected to add 90,000 jobs (previous: 162,000); average hourly earnings forecasted to rise 0.3%, same as prior. Also watch ECB President Lagarde's speech at the European Parliament, the Bank of Japan's September meeting minutes, and Eurozone PMI.
Watch the video now: https://youtu.be/tK1hDMUzViE
《Dr. Donald Tao》
*This week's column reflects the author's understanding and views on the economy, policy, and markets. It is personal opinion and not investment advice or solicitation.
*Articles published in "Economic Channel," whether signed or unsigned, represent the authors' personal opinions and do not reflect the stance of "Economic Channel," which serves merely as a platform for free expression.
