Shenwan Hongyuan Group: Future US deficit pressures may re-expand, AI investments could become a new variable for US bond rates.

Shenwan Hongyuan Group Securities released a research report stating that the fiscal pressure of the United States deficit may expand again in the future. Firstly, the IEEPA tariff refund may pose a new fiscal shock, with the refund expected to increase the deficit rate by 0.5-0.6 percentage points; secondly, the US-Iran conflict may lead to military expansion. The fiscal year 2026 US defense appropriation is $838.5 billion, of which $529 billion has been used as of April. If the US-Iran conflict continues, the existing appropriation may not effectively cover it. Global long-term bond pressure has not yet ended, and the decline in US bonds may face external interest rate constraints. As for the UK, if Burnham wins the by-election on June 18th and officially launches a party leadership challenge, the political uncertainty in the UK may further escalate, and UK bond yields may still have room to rise. As for Japan, if Japanese bond yields continue to rise, the attractiveness of domestic assets in Japan may further increase, and the rationale for US bond allocation may change. AI investment may become a new variable driving up US bond interest rates. Firstly, the concentration of AI companies issuing bonds directly increases the market's duration supply; secondly, interest rate swaps will bring about synthetic duration supply pressure; thirdly, demand-side pressures may squeeze the market's capacity to absorb duration. With US bond investors shifting their focus primarily to the US domestic market, competition between AI credit bonds, financial bonds, and government bonds may push up the equilibrium interest rates for long-term funds. The main points of Shenwan Hongyuan Group Securities are as follows: Since the geopolitical conflict, US bond interest rates have significantly increased, and the current market mainly analyzes US bond interest rates from the perspectives of oil prices, inflation, and monetary policy. However, when breaking down the interest rate structure, it can be found that the resilience of the US economy contributes more to interest rates, and there may be new disturbances in the future. I. Hot topic analysis: Reevaluation of US bond risks, to be continued (I) Breakdown of the rise in US bond interest rates: The contribution of economic fundamentals is greater than inflation expectations, and the stickiness of interest rate increases may be stronger. The overall US bond interest rate curve has risen, with the middle part of the curve seeing the largest increase. Since the US-Iran conflict, the front part of the US bond interest rate curve has remained stable, indicating that the market does not believe the Fed will immediately raise interest rates; the middle part of the 2-7 year curve has risen the most, indicating that the core of market trading is withdrawing expectations for future rate cuts; the long and super-long end rates have risen less than the middle of the curve, indicating that the market has not yet focused on trading fiscal risks. The rise in US bond interest rates can be divided into two stages, with the first stage dominated by the risk-neutral interest rate and the second stage accelerating term premium increases. The first stage from the outbreak of the US-Iran conflict to mid-May drove interest rates upward mainly due to weakened inflation and rate cut expectations; the second stage from mid-May until now, the core change was the accelerated rise in term premiums, indicating that the market is shifting towards rising bond compensation, policy uncertainty, and other factors. Further breakdown of the risk-neutral interest rate reveals that the rise in US bond interest rates is not mainly due to inflation, but the contribution of economic fundamentals is greater. Since the US-Iran conflict, expectations for actual short-term interest rates have increased by 15 basis points, while inflation expectations have increased by 9 basis points, indicating that the market is trading inflation brought about by geopolitical factors, but more importantly, the resilience of the US economy's contribution is greater, which is significantly different from the tariff shock in 2025. (II) The main contradictions of current US bonds: Bond-oil linkage rises, economic resilience and external risks Oil has become a key variable in the pricing of US bonds, suppressing expectations for rate cuts. After the outbreak of the US-Iran conflict, the correlation between US bonds and oil prices has increased, with the 20-day rolling correlation coefficient rising from 0.24 to 0.75, indicating a significant increase in the bond-oil linkage, with energy prices becoming a core variable in the bond market. The impact of energy prices can further transmit outward, causing inflation data to be stronger, weakening market pricing for rapid rate cuts. The stronger-than-expected performance of the US economy is an important support for the high US bond interest rates. Since March, the US Citigroup Economic Surprise Index has continued to rise, indicating that US data is overall stronger than previous market expectations. From the production side, both manufacturing and industrial data show that the economy still has expansion momentum. From the consumption side, consumption remains resilient. Stronger evidence of economic weakening is needed for interest rates to decline in the future. Risks related to UK political uncertainty and Japanese debt supply pressures are external factors driving the rise of US bond interest rates. Since mid-May, the UK and Japan have amplified global long bond volatility in two directions: political and fiscal risks in the UK and debt supply pressures in Japan. The UK election defeat leading to the risk of the prime minister resigning drove US bond rates up by 12 basis points on May 15th; in Japan, the pressure on Japanese bonds pushed US bonds to rise to 4.6%. (III) Underestimated variables in the second half of the year that may affect the central interest rate: AI investment may become a new variable driving up US bond interest rates The fiscal pressure of the United States deficit may expand again in the future. Firstly, the IEEPA tariff refund may pose a new fiscal shock, with the refund expected to increase the deficit rate by 0.5-0.6 percentage points; secondly, the US-Iran conflict may lead to military expansion. The fiscal year 2026 US defense appropriation is $838.5 billion, of which $529 billion has been used as of April. If the US-Iran conflict continues, the existing appropriation may not effectively cover it. Global long-term bond pressure has not yet ended, and the decline in US bonds may face external interest rate constraints. As for the UK, if Burnham wins the by-election on June 18th and officially launches a party leadership challenge, the political uncertainty in the UK may further escalate, and UK bond yields may still have room to rise. As for Japan, if Japanese bond yields continue to rise, the attractiveness of domestic assets in Japan may further increase, and the rationale for US bond allocation may change. AI investment may become a new variable driving up US bond interest rates. Firstly, the concentration of AI companies issuing bonds directly increases the market's duration supply; secondly, interest rate swaps will bring about synthetic duration supply pressure; thirdly, demand-side pressures may squeeze the market's capacity to absorb duration. With US bond investors shifting their focus primarily to the US domestic market, competition between AI credit bonds, financial bonds, and government bonds may push up the equilibrium interest rates for long-term funds. Risk warning: Escalation of geopolitical conflicts; US economic slowdown beyond expectations; Unexpected "hawkish" turn by the Federal Reserve.