Year-end inventory of US debt: "Twists and turns" in 2024. Will the "anchor of global asset pricing" in 2025 be wilder than in 2023?

Unlike the "crazy upward trend" in 2022 and 2023, the 10-year US Treasury yield curve, which is known as the "anchor of global asset pricing", experienced a sharp decline from the end of April to the end of September 2024, after a wave of highs, and has suddenly turned towards a bullish trend since October, a series of ups and downs. The inverted yield curve of the 2/5-year, 2/10-year, and 2/30-year US Treasuries, which dominated the financial market headlines since early 2022, ended in 2024. With the start of the "Trump 2.0 era" in 2025, the US Treasury yield curve may become even steeper. With the title of "King of Understanding," Trump is set to return to the White House in January, and the MAGA wave will once again sweep through America. Under the push of the rising far-right forces globally and the arrival of Trump's allies in the US Congress, a new chapter of "de-globalization" has quietly begun, and from 2025 onwards, we may witness the acceleration phase of the "de-globalization" process. Looking ahead to 2025, imposing tariffs on foreign countries may become a consensus in the Western world. In the increasingly divided "de-globalization" era, the growing US debt interest, military defense, and domestic welfare-driven fiscal spending will embark on a path of significant expansion. Concerns about the sustainability of the US government's growing debt and long-term inflation risks have been escalating significantly, with the return of the intimidating "term premium" shaking the financial markets once again. The "anchor of global asset pricing" is preparing for a wild surge that may surpass the over 5% surge in 2023. 2024, a year of shattered faith in US bonds Years later, as a retired fund manager looks at the latest trends in the 10-year US Treasury yield, he may recall the almost crazy bullish sentiment towards US bond prices at the end of 2023 - when Wall Street unanimously expected the 10-year US Treasury yield to drop to 3.5% in 2024, or even close to 3% - meaning that US bond prices were expected to enter a new bull market as Fed Chairman Powell unexpectedly signaled a rate cut and the market anticipated a "big year of rate cuts" in 2024. However, when this fund manager focuses on 2024, he abruptly realizes that reality can be cruel. In 2024, the Fed actually only cut rates by 100 basis points, instead of the anticipated 175 basis points at the end of 2023. Now, the 10-year US Treasury yield has skyrocketed to a staggering 4.6%. It has been almost 100 days since the Fed officially began this round of rate cuts on September 18, and the Fed has cut rates by a total of 100 basis points. However, during this period, the movement of US bonds has been like a "hike in rates," with the 10-year US Treasury yield crossing the 4.60% mark on Tuesday, indicating a nearly 100 basis point increase since the Fed cut rates in September. The 10-year US Treasury yield has recorded the largest increase in the first three months of a rate cut cycle since 1989. The surge in this yield after the Fed rate cut situation is only comparable to one other situation, which is the stagflation period in the early 1980s that all Wall Street financial institutions are reluctant to recall. The core of the long-term US bond yield curve trajectory is market expectations regarding future interest rates, inflation, bond scale, deficits, and other factors. At this point in time, the market's expectations for US bond prices lean towards pessimism, with some Wall Street investment firms even predicting that, under various threatening factors, the 10-year US Treasury yield may surge to 6% in 2025, in stark contrast to the fervent bullish sentiment at this time last year. Federal Reserve officials collectively release a hawkish stance advocating for the long-term maintenance of high rates. The inflation expectations driven by Trump's tariff hikes and tax cuts, expectations of neutral rates increasing, and the expectation of continued large-scale expansion of the budget deficit in the Trump 2.0 era all contribute to potential rate hikes being priced in by some traders. With these threats looming, the US bond yield curve may become increasingly steep - leading to a trajectory of climbing long-term US bond yields. The "anchor of global asset pricing" may experience a significant surge for a period next year, severely impacting risk assets such as stocks and cryptocurrencies. From a theoretical perspective, the 10-year US Treasury yield is equivalent to the risk-free rate indicator r in the important valuation model DCF valuation model within the stock market. When other indicators (especially the cash flow expectations on the numerator end) have not significantly changed - for example, during earnings seasons when the numerator is in a vacuum period - if the denominator level continues to be high or operate at historical highs, the valuation of risk assets such as technology stocks, high-yield corporate bonds, and cryptocurrencies may face a collapse. As inflation continues to cool down, combined with the boost from the "Sam Rule," all term US bond yields once experienced an overall decline The first quarter of this year saw a rise in inflation, driving up US bond yields, but from April to September, market investors in the bond market had a strong expectation of a decline in yields, especially for the 10-year US Treasury yield. The logic behind the strong bullish sentiment in the market was the signs of weak inflation and labor market in the US, leading investors to start pricing in expectations of a US recession, and market pricing for the Fed's rate cuts also reached annual highs. July's non-farm payroll data showed a significant slowdown in US business hiring and an unemployment rate that unexpectedly rose to the highest level in nearly three years - the unemployment rate unexpectedly rose to 4.3%, surpassing economists' expectations of 4.1%, rising for the fourth consecutive month. The July unemployment rate finally triggered the "Sam Rule," which has an accuracy rate of predicting economic recessions as high as 100%, combined with continued weak inflation data and worsening global geopolitical situations, pushing the "US economic recession expectations" and expectations for Fed rate cuts to extreme levels. The US bond market briefly priced in as many as 6 rate cuts by the Fed in 2024, and the bullish sentiment for US bond prices became hot. It is worth noting that during this period, the US Treasury's issuance size reached record highs, and by July 2024, the US Treasury had issued a total of...The scale of US government debt has risen to a record high of $35 trillion in August, and the budget deficit for the 2024 fiscal year (ends every September for the US government) has hit the third highest in history. The Biden administration's issuance of US debt over the next 3 fiscal years has skyrocketed unprecedentedly by over $8 trillion. However, these massive debt figures are currently being overshadowed by the bullish sentiment for US bonds due to market expectations of interest rate cuts reaching annual highs. This also poses a hidden danger for the sharp rise in US bond yields of various maturities in November.Overall, before September, market expectations for economic slowdown and continuous inflation decline have significantly increased. Yields on various maturity US Treasury bonds, especially long-term yields with maturities of 10 years or more, have significantly decreased. During this period, the "term premium" overall hovered in negative territory. In addition, the significant uncertainty in the global economy and geopolitical situation has also increased global funds' demand for US Treasuries as a safe haven, significantly pushing down yields. The term premium refers to the additional yield compensation required by investors holding long-term bonds to compensate for the risk. Starting in October, the "anchor of global asset pricing" went crazy! The Sam rule seems to have "bluffed", as data on the overall labor market in the US after July continued to show resilience for several months, with unexpected rises in the inflation rate. The market began to believe that the weakness in non-farm employment numbers in July, unexpected increases in the unemployment rate, and the return of the "Sam rule" to the market may be truly an "exception," triggering doubts about the weakness of the labor market and the possibility of a recession in the US economy. On the contrary, a series of economic data that followed, including strong consumer spending, sticky service inflation, and continuously lower-than-expected initial jobless claims, showed a significant increase in US inflation and continued stable expansion in the labor market. Combined with the diminishing negative impact of geopolitical issues over time, the US economy is more likely to achieve a "soft landing" rather than entering a recession. Due to the recent rise in inflation and the resilience of the labor market since October, expectations for interest rate cuts have been significantly reduced. Additionally, the increasingly powerful impact of the large US debt, which was previously suppressed by market optimism, began to show. With the victory of Trump in November, the market began to price in the increasing size of the debt under the "MAGA fiscal framework" in the Trump 2.0 era, pushing up the yields of 10-year US Treasury bonds more rapidly since November. MAGA, which stands for "Make America Great Again," is the English abbreviation used to refer to the core approach of all policies led by Trump's government and is also used by some mainstream media to refer to Trump himself and the fervent supporters of Trump in the US. Statistical data published by the US Treasury Department show that the total amount of US debt reached $34 trillion at the beginning of January 2024, rose to $35 trillion by the end of July this year, a new high at the time, within about 7 months. However, from $35 trillion at the end of July to $36 trillion in November, this $1 trillion increase in US debt took only 3 months to create a historical record. The rapid growth of the US debt scale also means that in the Trump 2.0 era, not only will more debt need to be issued to deal with tax cuts and defense and social spending under "anti-globalization," but also larger interest payments on the US debt will need to be repaid. These are the core reasons for the recent significant fluctuations in yields of 10-year US Treasury bonds. For various maturity US Treasury bonds, especially long-term bonds with maturities of 10 years or more, the "nuclear bomb" driving the plummeting prices of US Treasury bonds or the violent rise in yields is undoubtedly the "hawkish rate cut" stance exhibited by the Federal Reserve in the recent December rate decision. This also signals the complete shattering of the market's dream of rate cuts. "higher for longer" returns to the financial market's field of view after a year. While the Federal Reserve announced rate cuts as expected by the market, the latest "dot plot" shows that the rate cut expectations for 2025 have been significantly reduced from the four expectations announced at the end of the previous quarter to two, and the rate expectations for 2026 and the market's focus on the "neutral rate" have also been adjusted upwards. This forced the US bond market to reprice rate cut expectations. Additionally, the increasingly climbing budget deficit expectations push the "anchor of global asset pricing" to lead various maturity yields suddenly into an upward trajectory. Some Federal Reserve officials have even begun to weigh Trump's policy expectations, as shown in the "dot plot" displaying a hawkish stance on rates and the Federal Reserve's economic outlook showing PCE inflation far higher than the previous quarter's expectations. After the dot plot was released and Powell's press conference, the pricing of forward contracts for rate cuts for next year were also significantly reduced, even beginning to price in no rate cuts next year. A recent forecast from Deutsche Bank shows that the bank predicts the Federal Reserve will pause rate cuts next year, with the loose Federal Reserve policy cycle essentially stagnating. The "Trump 2.0 era" is about to begin, and we will witness a surge in "anti-globalization"! Get ready for the new round of upward trajectory in the "anchor of global asset pricing." With Trump's return to the White House, and the strong influence of "far-right forces" sweeping through Germany and France, even reaching the seemingly peaceful Oceania, and the penetration of far-right forces into the parliaments of Japan, Korea, and Southeast Asia, as well as the collapse of the Assad government in Syria leading to Erdogan-led far-right influence spreading in the Middle East, geopolitical unrest is intensifying under the global political shift to the right, undoubtedly pushing the process of "anti-globalization" into an accelerated phase. 2025 may be a year of significant importance in financial history. From this year on, protectionism may prevail, the trend of anti-globalization will continue to raise costs. The "anchor of global asset pricing," as well as the benchmark yields of many countries' sovereign bonds, may continue to break upward, long maintained near historical highs. Perhaps it is time to bid farewell to the long-standing era of globalization and low borrowing costs. The "term premium" that once terrified the financial market is making a comeback. Statistical data shows that the term premium has been on the rise since September, reflecting investors' concerns about future uncertainties, such as risks of rising interest rates, inflation, and expanding deficits. After the Federal Reserve's shift to a hawkish stance, the return of "higher for longer" to the market has led to the market beginning to price in the possibility of no rate cuts in 2025 and continuous upward trends in neutral rate expectations. The more important logic lies in the fact that the Trump 2.0 era may accelerate inflation and the size of debt issuance and federal budget deficits, combined with the refusal of major US debt holding countries such as China and Japan to increase their US debt holdings under "anti-globalization," leading to the possibility of substantial reduction of US debt holdings. Investors in US Treasuries are concerned about potential fluctuations in the yields of 10-year US Treasury bonds in the near future.The Ministry of Finance, which has been heavily issuing bonds in recent years, will increasingly struggle to repay the rising interest on its debt in the future, leading to higher long-term US Treasury yields.Earlier this month, Nick Timiraos, a journalist for The Wall Street Journal known as the "mouthpiece of the Federal Reserve," wrote that the low interest rate era in the United States may have come to an end. If Federal Reserve officials collectively believe that the neutral interest rate has risen, they may stop cutting rates for a considerable period of time. It may not be the worst scenario for the Federal Reserve to significantly reduce the number of rate cuts or to hit the "cut pause button," as warned recently by Torsten Slok, Chief Economist at Apollo Global Management. He cautioned that the Federal Reserve may have to return to raising rates in 2025, due to the continuing strength of the U.S. economy and the potential for significant inflation resulting from President Trump's planned policies. According to data from the U.S. Department of the Treasury, the total amount of U.S. debt in 2024 successively exceeded $34 trillion, $35 trillion, and $36 trillion, reaching historic highs, with the more significant milestone from $35 trillion in late July to $36 trillion in November. The massive deficit is the core reason for the continued increase in total debt issuance by the U.S. Department of the Treasury. The U.S. government recorded a budget deficit of over $1.8 trillion in the 2024 fiscal year, an increase of over 8% from the previous year, marking the third highest deficit in history. Net interest payments in the 2024 fiscal year have already reached $882 billion, with interest expenses growing at a record 34%, becoming the third largest expenditure item in the budget, second only to social security and healthcare, surpassing even defense spending in the 2024 fiscal year. According to the Congressional Budget Office (CBO) forecast, the size of U.S. debt will increase to nearly $51 trillion by the 2034 fiscal year, with the debt-to-GDP ratio reaching 106.2% in 2027, surpassing the historical high after World War II. The debt-to-GDP ratio is expected to reach 122% in the 2034 fiscal year. The CBO predicts that the budget deficit will significantly expand to $2.9 trillion in the 2034 fiscal year, with total budget deficits reaching $22 trillion between 2025 and 2034. The CBO also expects net interest payments in the 2025 fiscal year to reach a new historic high, approaching $1 trillion, accounting for 3.4% of GDP, surpassing the 3.2% historical record set in 1991. By the 2034 fiscal year, net interest payments are expected to reach nearly $1.7 trillion, accounting for 4.1% of GDP. Some economists believe that under the leadership of Elon Musk, the effectiveness of the U.S. government's Department of Efficiency (DOGE) in cutting budgets is unlikely to change the trend of massive U.S. debt issuance, especially considering the staggering size of interest payments and the fact that DOGE is only an advisory agency with no authority to directly dismiss federal employees or intervene in federal agency spending. Renowned economist Nouriel Roubini, dubbed the "doomsday doctor," recently stated that Trump's policy agenda, including his support for loose monetary policy and increased tariffs, could weaken price stability and warned to prepare for long-term Treasury bond yield increases of 10 years or more. In a world where average inflation may be 5% instead of 2%, bond yields could approach 7%-8%, rather than the current 4%. This presents significant price risk for traditional safe assets like Treasury bonds. Roubini expressed this sentiment in a recent interview. Roubini received the "doomsday doctor" title due to his accurate foresight of the global financial crisis in 2008. Leading U.S. asset manager T.Rowe Price believes that as the U.S. fiscal situation deteriorates and Donald Trump's policies lead to rising inflation, the 10-year Treasury bond yield could climb to 6% for the first time in over 20 years. Arif Husain, Chief Investment Officer for Fixed Income at T.Rowe Price, stated in a report that the 10-year Treasury bond yield could reach 5% in the first quarter of 2025, and may continue to rise thereafter. Husain further raised his forecast for Treasury bond yields, citing Trump's second term of tax cuts leading to a continued expansion of the U.S. budget deficit, significant divestment of U.S. debt by China and Japan, and potential tariff and immigration policies that will keep price pressure in the U.S. As markets begin to worry that Trump's policies will stimulate inflation and significantly increase financial pressure, the outlook for U.S. bonds is becoming increasingly dim. T.Rowe Price's expectation of 6% for the "global asset pricing anchor" seems more pessimistic than that of its peers. ING believes that the 10-year Treasury bond yield could reach 5% to 5.5% next year, while Franklin Templeton and JPMorgan expect it to reach 5%. The forecast data from the World Government Bonds platform is also very aggressive. Using econometric models and AI trend tracking algorithms, the platform predicts that by the end of March 2025, the 10-year Treasury bond yield could reach as high as 5.50%, and it could hit 6.09% by September next year. The forecast for the end of next year is even more aggressive, showing that the 10-year Treasury bond yield could be around 6.66% by December 2025.