The U.S. 30-year Treasury yield briefly broke through 5.62%, hitting a new high since 2002. The U.S. bond market has declined for nine consecutive days, with the entire yield curve shifting upward. The spread between the 10-year and 2-year Treasury yields has further narrowed, drawing closer to yield curve inversion. Corporate credit markets are also turbulent, with CDS prices of individual AI Hyperscaler-level companies approaching the levels seen before Chinese property developers' dollar bonds ran into trouble. In short, warning signs are flashing frequently.
There are multiple reasons behind the bond market turbulence. The U.S.-Iran conflict appears far from resolution, with Brent crude oil prices rising above $100 per barrel again; U.S. inflation's decline has stalled, prompting the dovish Federal Reserve to adopt a hawkish stance, potentially leading to stronger-than-expected rate hikes; the interest rate differential between the U.S. dollar and currencies like the yen and euro has narrowed, causing overseas capital to flow out of dollar-denominated assets. However, no one expects rate hikes to stop gasoline and diesel prices from rising, and fluctuations in interest rates and the dollar are all cyclical factors.
The greater risks stem from structural factors—the U.S. liquidity environment is shifting from abundance to scarcity. U.S. Treasury yields have almost universally risen to levels not seen since before 2008, indicating that the ultra-loose monetary environment created by two rounds of QE has completely vanished. Despite the Fed's balance sheet remaining much larger than in 2008, the economy is bigger, demand for funds is higher, market leverage is stronger, and the frenzy in U.S. equities is approaching Dotcom-era levels.
The first reason for the structural decline in market liquidity is the persistent annual fiscal deficits. It took the U.S. over 200 years to accumulate its first $1 trillion in federal debt, but now it racks up $1 trillion every seven months. The Treasury's annual interest payments have already surpassed the combined federal defense and education budgets, and Uncle Sam shows no intention of slowing down its reckless spending. The market is voting with its feet, signaling to the government that this is unsustainable.
The second reason is that tech giants have generated massive profits in recent years, which they previously used to buy back shares. However, the AI arms race means even the wealthy landlords are running low on reserves, and their free cash flow is beginning to fall short. Hyperscalers are increasingly issuing debt—not only dollar-denominated bonds but also euro and even Swiss franc bonds. Smaller companies are raising funds through private credit and infrastructure funds, locking up short-term capital that would have otherwise stayed in banks or money market funds into long-term investments. The AI industry is expected to face a funding gap of at least $3.5 trillion over the next three years, inevitably competing with Treasury issuance for capital.
The third reason is de-dollarization and de-Treasurization. Since the U.S. froze Russia's assets in America, countries and high-net-worth individuals have begun worrying whether their dollar assets could be 'weaponized,' leading to quiet adjustments in capital allocation. Inflows of foreign capital have long been a crucial support for U.S. Treasuries.
The fourth reason is the Federal Reserve's 'whatever it takes' approach to fighting inflation, which has driven up the Treasury's borrowing costs. With long-term bonds under pressure, Beneset has focused this year's issuance on short-term debt, but the Fed's hawkish rate hikes have pushed up short-term borrowing costs as well. The policy objectives of the Fed and the Treasury are fundamentally at odds, and the bond market chaos reflects rising risk premiums.
The market has issued various warnings about Treasury yields breaking psychological thresholds, but I personally pay little attention to such psychological levels, preferring to believe this is a process of slowly boiling a frog in warm water. The trend of liquidity shortage is already established; it's just unclear when and how it will erupt. The bond market is like a gas station filled with vapor—when the spark will appear is unpredictable. The most fragile link in the entire capital market (such as a failed large-model IPO or a major company's credit rating downgrade) could trigger a chain reaction.
I want to emphasize that the rise in U.S. Treasury yields from near zero to 5% represents a massive shift. The last time such a dramatic change occurred was in the early 1980s, under Paul Volcker's leadership at the Fed. None of today's Wall Street analysts who offer commentary have experienced the brutal conditions of that era, nor have I. I may not be particularly talented, but investors should exercise caution.
Despite the bond market turmoil, U.S. equities appear remarkably calm. The profitability of large tech giants remains strong, which is the biggest difference from the Dotcom bubble. Currently, S&P valuations are somewhat higher than historical averages, but not crazily expensive. It's worth noting that earnings are concentrated in tech companies and banks, and their profit outlooks depend heavily on AI, including substantial 'cyclical booms.'
Finally, I'd like to share a quote I saw on X. Charlie Bileiro said: 'NVIDIA's market cap of $5.4 trillion exceeds the combined market cap of all companies in the Russell 2000 index by $2 trillion. That seems crazy—until you realize NVIDIA earned $193 billion in profit over the past year, while the Russell 2000 companies collectively lost $13 billion.' This statement carries many meanings; readers are invited to reflect on it themselves. — Tao Dong
*The views expressed in this article are purely personal and do not represent the official stance or forecasts of the author's institution, nor constitute investment advice or solicitation.
*Articles published in <Economic Times>, whether signed or unsigned, represent the authors' personal opinions and do not reflect the position of <Economic Times>. <Economic Times> serves as a platform for free expression.
There are multiple reasons behind the bond market turbulence. The U.S.-Iran conflict appears far from resolution, with Brent crude oil prices rising above $100 per barrel again; U.S. inflation's decline has stalled, prompting the dovish Federal Reserve to adopt a hawkish stance, potentially leading to stronger-than-expected rate hikes; the interest rate differential between the U.S. dollar and currencies like the yen and euro has narrowed, causing overseas capital to flow out of dollar-denominated assets. However, no one expects rate hikes to stop gasoline and diesel prices from rising, and fluctuations in interest rates and the dollar are all cyclical factors.
The greater risks stem from structural factors—the U.S. liquidity environment is shifting from abundance to scarcity. U.S. Treasury yields have almost universally risen to levels not seen since before 2008, indicating that the ultra-loose monetary environment created by two rounds of QE has completely vanished. Despite the Fed's balance sheet remaining much larger than in 2008, the economy is bigger, demand for funds is higher, market leverage is stronger, and the frenzy in U.S. equities is approaching Dotcom-era levels.
The first reason for the structural decline in market liquidity is the persistent annual fiscal deficits. It took the U.S. over 200 years to accumulate its first $1 trillion in federal debt, but now it racks up $1 trillion every seven months. The Treasury's annual interest payments have already surpassed the combined federal defense and education budgets, and Uncle Sam shows no intention of slowing down its reckless spending. The market is voting with its feet, signaling to the government that this is unsustainable.
The second reason is that tech giants have generated massive profits in recent years, which they previously used to buy back shares. However, the AI arms race means even the wealthy landlords are running low on reserves, and their free cash flow is beginning to fall short. Hyperscalers are increasingly issuing debt—not only dollar-denominated bonds but also euro and even Swiss franc bonds. Smaller companies are raising funds through private credit and infrastructure funds, locking up short-term capital that would have otherwise stayed in banks or money market funds into long-term investments. The AI industry is expected to face a funding gap of at least $3.5 trillion over the next three years, inevitably competing with Treasury issuance for capital.
The third reason is de-dollarization and de-Treasurization. Since the U.S. froze Russia's assets in America, countries and high-net-worth individuals have begun worrying whether their dollar assets could be 'weaponized,' leading to quiet adjustments in capital allocation. Inflows of foreign capital have long been a crucial support for U.S. Treasuries.
The fourth reason is the Federal Reserve's 'whatever it takes' approach to fighting inflation, which has driven up the Treasury's borrowing costs. With long-term bonds under pressure, Beneset has focused this year's issuance on short-term debt, but the Fed's hawkish rate hikes have pushed up short-term borrowing costs as well. The policy objectives of the Fed and the Treasury are fundamentally at odds, and the bond market chaos reflects rising risk premiums.
The market has issued various warnings about Treasury yields breaking psychological thresholds, but I personally pay little attention to such psychological levels, preferring to believe this is a process of slowly boiling a frog in warm water. The trend of liquidity shortage is already established; it's just unclear when and how it will erupt. The bond market is like a gas station filled with vapor—when the spark will appear is unpredictable. The most fragile link in the entire capital market (such as a failed large-model IPO or a major company's credit rating downgrade) could trigger a chain reaction.
I want to emphasize that the rise in U.S. Treasury yields from near zero to 5% represents a massive shift. The last time such a dramatic change occurred was in the early 1980s, under Paul Volcker's leadership at the Fed. None of today's Wall Street analysts who offer commentary have experienced the brutal conditions of that era, nor have I. I may not be particularly talented, but investors should exercise caution.
Despite the bond market turmoil, U.S. equities appear remarkably calm. The profitability of large tech giants remains strong, which is the biggest difference from the Dotcom bubble. Currently, S&P valuations are somewhat higher than historical averages, but not crazily expensive. It's worth noting that earnings are concentrated in tech companies and banks, and their profit outlooks depend heavily on AI, including substantial 'cyclical booms.'
Finally, I'd like to share a quote I saw on X. Charlie Bileiro said: 'NVIDIA's market cap of $5.4 trillion exceeds the combined market cap of all companies in the Russell 2000 index by $2 trillion. That seems crazy—until you realize NVIDIA earned $193 billion in profit over the past year, while the Russell 2000 companies collectively lost $13 billion.' This statement carries many meanings; readers are invited to reflect on it themselves. — Tao Dong
*The views expressed in this article are purely personal and do not represent the official stance or forecasts of the author's institution, nor constitute investment advice or solicitation.
*Articles published in <Economic Times>, whether signed or unsigned, represent the authors' personal opinions and do not reflect the position of <Economic Times>. <Economic Times> serves as a platform for free expression.
