The global bond market has been repeatedly sold off, with yields approaching the highs of this century, until a U.S. Treasury auction on October 8 saw a very high winning interest rate but strong overseas demand, triggering capital inflows to buy the dip, causing the 10-year Treasury yield to drop directly by 10 basis points. Despite bond market volatility, U.S. stocks continued to rise, led by AI-related stocks, but the market remains concerned about the impact of high interest rates on the banking industry, corporate financing, and the real estate market.
FOMC meeting minutes showed U.S. policymakers still intend to raise rates, with futures markets expecting a second hike in December. The Bank of Japan governor stated core inflation has met targets, hinting at no rate hike in October. France erupted in large-scale street protests, and the Spanish government announced early elections, causing the euro to continue weakening last week amid bond market turmoil. Houthi militants attacked an airport in Saudi Arabia, pushing up Brent crude oil prices. West Texas crude prices remained relatively stable, but supply and demand imbalances persist in refined products like diesel, and natural gas prices surged. Amid market and geopolitical turmoil, gold prices rebounded last week.
Last week, the U.S. Treasury auctioned $39 billion in 10-year Treasury bonds, with a winning yield of 5.3%, the highest since November 2000, and oversubscribed by 2.77 times, far exceeding the average of 2.54 times in the past five auctions. Overseas demand was particularly strong, with market interpretation suggesting overseas sovereign funds, insurance funds, and pension funds re-entering the market, receiving 80.3% of the total allocation from underwriters. This was a remarkably strong auction and subscription, with high-net-worth funds beginning to discuss whether U.S. long-term bond yields are nearing their peak, clearly accelerating their entry pace.
First, this auction dispelled the gloom of the past few months, with domestic and overseas real-money investors viewing yields as becoming increasingly attractive. Second, the Iran conflict, Saudi conflict, and Russia-Ukraine war continue, with high uncertainty, yet capital appears willing to enter markets, demanding sufficient yield levels to compensate for risk premiums. Third, the U.S. fiscal situation is not optimistic, but other major developed nations are similarly dire, with weaker risk resilience, thus driving capital into dollar-denominated assets for safe-haven purposes.
This auction indicates demand for U.S. Treasuries exists, but prices must reflect premiums arising from fiscal and inflation risks. Yields around 5.3% are beginning to attract some capital to increase U.S. bond allocations. Note, this is only a portion of capital, not all; the chief investment officer of the giant bond fund PIMCO discussed the risk of 10-year yields rising to 6%, though the market is no longer uniformly bearish. The tug-of-war between bulls and bears will determine future Treasury market direction and the timing of yield peaks.
Although the auction revealed demand from certain capital, especially overseas large funds, it hasn't resolved the awkwardness on the supply side. The U.S. fiscal situation shows no fundamental improvement, and the government appears to lack even the will to improve it. Bond supply imbalances may continue pushing up issuance costs. Meanwhile, inflation improvement is slow, and the U.S. Federal Reserve expects further rate hikes, creating significant uncertainty for the bond market.
Bond market volatility has so far had limited impact on U.S. stocks. First, large tech firms' profitability is strong; second, the tech sector is less sensitive to interest rate cycles; third, global cash fears missing out on the AI concept. In reality, U.S. stocks outside AI, including bank stocks, have already deeply suffered from high interest rates, though this isn't reflected in stock indices. As for AI companies issuing bonds or raising private capital, the damage from high rates is already evident, as any movement in risk-free assets triggers ripple effects across other assets.
The author believes genuine demand is gradually emerging, and U.S. long-term bond yields have entered a phase of searching for a peak, but the exact peak level depends on inflation trends and the Fed's stance. Monitor the peak-seeking process and the spillover risks from high U.S. bond yields to stock markets and overseas bond markets.
Shifting to differences between China and the U.S. in the AI field. The U.S. AI industry is more driven by market capital, thus capital returns and commercialization paths face stronger market constraints, making heavy investment, closed-source weights, and closed models the prevalent business model. China's AI industry has more diversified funding sources, with local government industrial funds and state-owned capital platforms playing important roles alongside internet platforms and private capital. Most adopt open weights and open-source models, focusing more on AI's social and inclusive value, with funding levels far below their U.S. counterparts.
There are significant directional differences in computing power usage between the two countries: the U.S. focuses more on R&D, while China emphasizes monetizing applications. From public API token consumption data, over half of U.S. token usage is for programming development and enterprise automation, whereas in China, about half of token usage is for short videos, short dramas, and visual content production, with a significantly lower proportion used for technical R&D compared to the U.S. The U.S. is brewing faster and larger technological breakthroughs, while China attempts to feed AI industry development through application monetization while closely following technological leaders.
Based on the author's subjective assessment of frontier model capabilities and product iteration pace, the gap between the two was about six months at the beginning of the year, narrowed to 3-4 months mid-year, and recently widened again to about six months. The main reason for the widening gap lies in computing power; U.S. export restrictions on AI hardware hinder China's computing power expansion, while China is already on par with the U.S. in talent, algorithms, and data. In fact, differences in large model parameters are now unimportant—sufficient capability suffices—and competition extends to the application layer, where profitability certainty matters more.
In AI applications, both China and the U.S. face similar bottlenecks; low-hanging fruit like programming benefits have been harvested, but enterprise adoption is slower than initially expected. Enterprises feel uncertain about scenario setting and value validation in AI transformation, encountering high friction coefficients when integrating transformation with existing architectures and processes. Each industry and enterprise presents non-standardized application scenarios, and the author expects a 5-10 year gradual and adaptive process. Users seem to find existing products sufficient, with most unwilling to pay higher fees for new products.
In data center construction, U.S. annual capital expenditure is about six times larger than China's, though the gap in investment efficiency is much smaller. Chinese tech giants also face near-exhaustion of free cash flow this year, though funding gap pressure appears temporarily manageable. China's capital market depth and liquidity lag behind the U.S., but local state capital, telecom operators, and the banking system offer financing channels different from U.S. capital markets, somewhat alleviating funding pressures for AI firms.
The end of the AI revolution is power supply. The U.S. has entered an era of power shortages this year, while China's power supply remains abundant. China's annual new installed capacity is equivalent to about half of the total U.S. installed capacity, while the U.S. faces dual constraints of insufficient power generation and transmission limitations. China's 46 ultra-high-voltage transmission lines efficiently and cheaply transfer wind and solar power generated in the west to coastal regions, an advantage the U.S. cannot match.
Important data this week is sparse. U.S. September CPI is expected to show a technical rebound, with forecast monthly increase of 0.6% and annual increase of 3.6%, core CPI forecast monthly increase of 0.2% and annual increase of 2.5%, slightly higher than the previous period. Watch the Fed's Beige Book, U.S. retail data (expected to soften significantly), and China's monthly data. Tao Dun on the World
*This week's article expresses the author's understanding and views on the economy, policy, and markets, representing personal opinions only, and does not constitute investment advice or solicitation.
*Articles published in ETtoday, signed or unsigned, represent the authors' personal opinions and do not reflect ETtoday's stance. ETtoday serves as a platform providing free speech.
FOMC meeting minutes showed U.S. policymakers still intend to raise rates, with futures markets expecting a second hike in December. The Bank of Japan governor stated core inflation has met targets, hinting at no rate hike in October. France erupted in large-scale street protests, and the Spanish government announced early elections, causing the euro to continue weakening last week amid bond market turmoil. Houthi militants attacked an airport in Saudi Arabia, pushing up Brent crude oil prices. West Texas crude prices remained relatively stable, but supply and demand imbalances persist in refined products like diesel, and natural gas prices surged. Amid market and geopolitical turmoil, gold prices rebounded last week.
Last week, the U.S. Treasury auctioned $39 billion in 10-year Treasury bonds, with a winning yield of 5.3%, the highest since November 2000, and oversubscribed by 2.77 times, far exceeding the average of 2.54 times in the past five auctions. Overseas demand was particularly strong, with market interpretation suggesting overseas sovereign funds, insurance funds, and pension funds re-entering the market, receiving 80.3% of the total allocation from underwriters. This was a remarkably strong auction and subscription, with high-net-worth funds beginning to discuss whether U.S. long-term bond yields are nearing their peak, clearly accelerating their entry pace.
First, this auction dispelled the gloom of the past few months, with domestic and overseas real-money investors viewing yields as becoming increasingly attractive. Second, the Iran conflict, Saudi conflict, and Russia-Ukraine war continue, with high uncertainty, yet capital appears willing to enter markets, demanding sufficient yield levels to compensate for risk premiums. Third, the U.S. fiscal situation is not optimistic, but other major developed nations are similarly dire, with weaker risk resilience, thus driving capital into dollar-denominated assets for safe-haven purposes.
This auction indicates demand for U.S. Treasuries exists, but prices must reflect premiums arising from fiscal and inflation risks. Yields around 5.3% are beginning to attract some capital to increase U.S. bond allocations. Note, this is only a portion of capital, not all; the chief investment officer of the giant bond fund PIMCO discussed the risk of 10-year yields rising to 6%, though the market is no longer uniformly bearish. The tug-of-war between bulls and bears will determine future Treasury market direction and the timing of yield peaks.
Although the auction revealed demand from certain capital, especially overseas large funds, it hasn't resolved the awkwardness on the supply side. The U.S. fiscal situation shows no fundamental improvement, and the government appears to lack even the will to improve it. Bond supply imbalances may continue pushing up issuance costs. Meanwhile, inflation improvement is slow, and the U.S. Federal Reserve expects further rate hikes, creating significant uncertainty for the bond market.
Bond market volatility has so far had limited impact on U.S. stocks. First, large tech firms' profitability is strong; second, the tech sector is less sensitive to interest rate cycles; third, global cash fears missing out on the AI concept. In reality, U.S. stocks outside AI, including bank stocks, have already deeply suffered from high interest rates, though this isn't reflected in stock indices. As for AI companies issuing bonds or raising private capital, the damage from high rates is already evident, as any movement in risk-free assets triggers ripple effects across other assets.
The author believes genuine demand is gradually emerging, and U.S. long-term bond yields have entered a phase of searching for a peak, but the exact peak level depends on inflation trends and the Fed's stance. Monitor the peak-seeking process and the spillover risks from high U.S. bond yields to stock markets and overseas bond markets.
Shifting to differences between China and the U.S. in the AI field. The U.S. AI industry is more driven by market capital, thus capital returns and commercialization paths face stronger market constraints, making heavy investment, closed-source weights, and closed models the prevalent business model. China's AI industry has more diversified funding sources, with local government industrial funds and state-owned capital platforms playing important roles alongside internet platforms and private capital. Most adopt open weights and open-source models, focusing more on AI's social and inclusive value, with funding levels far below their U.S. counterparts.
There are significant directional differences in computing power usage between the two countries: the U.S. focuses more on R&D, while China emphasizes monetizing applications. From public API token consumption data, over half of U.S. token usage is for programming development and enterprise automation, whereas in China, about half of token usage is for short videos, short dramas, and visual content production, with a significantly lower proportion used for technical R&D compared to the U.S. The U.S. is brewing faster and larger technological breakthroughs, while China attempts to feed AI industry development through application monetization while closely following technological leaders.
Based on the author's subjective assessment of frontier model capabilities and product iteration pace, the gap between the two was about six months at the beginning of the year, narrowed to 3-4 months mid-year, and recently widened again to about six months. The main reason for the widening gap lies in computing power; U.S. export restrictions on AI hardware hinder China's computing power expansion, while China is already on par with the U.S. in talent, algorithms, and data. In fact, differences in large model parameters are now unimportant—sufficient capability suffices—and competition extends to the application layer, where profitability certainty matters more.
In AI applications, both China and the U.S. face similar bottlenecks; low-hanging fruit like programming benefits have been harvested, but enterprise adoption is slower than initially expected. Enterprises feel uncertain about scenario setting and value validation in AI transformation, encountering high friction coefficients when integrating transformation with existing architectures and processes. Each industry and enterprise presents non-standardized application scenarios, and the author expects a 5-10 year gradual and adaptive process. Users seem to find existing products sufficient, with most unwilling to pay higher fees for new products.
In data center construction, U.S. annual capital expenditure is about six times larger than China's, though the gap in investment efficiency is much smaller. Chinese tech giants also face near-exhaustion of free cash flow this year, though funding gap pressure appears temporarily manageable. China's capital market depth and liquidity lag behind the U.S., but local state capital, telecom operators, and the banking system offer financing channels different from U.S. capital markets, somewhat alleviating funding pressures for AI firms.
The end of the AI revolution is power supply. The U.S. has entered an era of power shortages this year, while China's power supply remains abundant. China's annual new installed capacity is equivalent to about half of the total U.S. installed capacity, while the U.S. faces dual constraints of insufficient power generation and transmission limitations. China's 46 ultra-high-voltage transmission lines efficiently and cheaply transfer wind and solar power generated in the west to coastal regions, an advantage the U.S. cannot match.
Important data this week is sparse. U.S. September CPI is expected to show a technical rebound, with forecast monthly increase of 0.6% and annual increase of 3.6%, core CPI forecast monthly increase of 0.2% and annual increase of 2.5%, slightly higher than the previous period. Watch the Fed's Beige Book, U.S. retail data (expected to soften significantly), and China's monthly data. Tao Dun on the World
*This week's article expresses the author's understanding and views on the economy, policy, and markets, representing personal opinions only, and does not constitute investment advice or solicitation.
*Articles published in ETtoday, signed or unsigned, represent the authors' personal opinions and do not reflect ETtoday's stance. ETtoday serves as a platform providing free speech.
