Soochow Chen Li: The U.S. bond crisis is not over; it has only been temporarily suppressed.

How high do interest rates on U.S. Treasuries need to go for someone to buy them? U.S. Treasuries will always find buyers. The real question is how high yields must rise for buyers to be willing to enter the market. The so-called bond crisis isn't about an immediate U.S. default; it's about the long-term loss of a stable financing cost anchor. The yield on the 30-year U.S. Treasury reached 5.3%, marking a new high not seen since 2007. The 10-year yield also rose simultaneously. This isn't just an American issue: long-term interest rates are climbing across the UK, Germany, and Japan. Short-term rates are relatively stable, but long-term rates are the most glaring. This isn't just a straightforward rate hike tradewhere short-term rates decline while long-term rates rise. What the market is re-pricing are the fiscal risks, the credibility of inflation, and the supply of long-term bonds. In July, U.S. retail sales and PPI data were generally soft, leading to a decrease in expectations for the Fed to hike rates in the near term. Short-term rates did not follow the long-term rise: the 2-year yield actually declined during the same period, resulting in a noticeable steepening of the yield curve. However, this does not mean that long-term inflation concerns have vanished. A decline in short-term rates only indicates that the market is not continuing to price in recent rate hikes; it does not prove that the market is completely at ease with future price trajectories. What is truly increasing is the real interest rate and term premium. In July, the U.S. fiscal deficit reached $432.3 billion, the highest since March 2021, with a cumulative deficit of nearly $1.8 trillion this year and an expected annual total around $1.9 trillion, coupled with projected interest expenditures of up to $16.2 trillion over the next decade. Additionally, Treasury Secretary Janet Yellen's collaboration with Japan to intervene in the currency market, and the opaque communication style of incoming Fed Chair Michael Barr since his appointment, are amplifying market uncertainty. U.S. Treasuries will always sell; the question is how high the yields will go. Long-term buyers have not disappeared. Pension funds, insurance institutions, foreign reserve entities, and asset management firms are still present; they have simply become more price-sensitive. Banks are constrained by capital limitations, reducing their willingness to buy bonds. Overseas buyers now face currency hedging costs, making U.S. Treasuries less attractive than in the past. There are plenty of buyers for U.S. Treasuries; what is lacking is the willingness to purchase at low yields. As yields rise, buying interest will naturally returnbut at the cost of higher financing costs than in the past. The era of low interest rates may not return. AI bonds are not the source of the fire but have increased duration supply. Recently, major tech companies have been issuing bonds, often viewed as the culprit behind rising long-term rates. However, a more accurate description is that AI bond issuance coincided with a peak in long-term U.S. Treasury financing in the third quarter, with about $42 billion issued for 20-year maturities and approximately $69 billion for 30-year maturities. The combination of these factors has amplified supply pressures. It acts as a catalyst, not the source of the problem. The real underlying issue remains the fiscal deficit and the scale of debt supply. The Treasury can buy time but not eliminate the deficit. Faced with 30-year rates nearing multi-year highs, Secretary Yellen took action: the repurchase size was doubled from $2 billion to at least $4 billion. Treasury repurchases are not quantitative easing (QE). The Treasury buys back old debt but must still rely on issuing new debt to raise funds; in contrast, the Fed's QE directly creates reserves to purchase assets, effectively removing duration from the market. The mechanics of the two are different, and their scales are not comparableonly for the 20-year and 30-year securities, the total new issuance this quarter is around $110 billion, while the repurchase's additional $14 billion is merely a drop in the bucket. Treasury repurchases can improve liquidity but cannot reduce the government's financing needs. They can buy time but cannot eliminate the deficit. There are no signs of the deficit contracting; the bond issuance scale will only grow larger. Fiscal contraction is politically unfeasible; the Fed has yet to meet its inflation target and is unlikely to recklessly restart QE. Thus, long-term rates are likely to continue pressing against their peaks. The bond crisis has not ended; it has simply been temporarily suppressed. Who gets hurt and who benefits from rising long-term rates? A 5.3% interest rate does not necessarily cause a crisis. The real danger lies in a rapid increase of 30 basis points in just a few daysthat could trigger deleveraging and liquidity crunches. The risk is not high rates but rather disordered rates. In comparison to the VIX, it is more insightful to monitor the bond market's own pressure signals: the MOVE index, auction tail metrics, the ratio of indirect bidders, and financing costs in the repo market. These indicators are the true barometer of whether the bond crisis is spiraling out of control. High interest rates first impact valuation anchors. Over the past few years, the pricing logic for many assets was that rates would decline, allowing longer-term cash flows to be discounted at lower rates. This premise is now shaken. Growth stocks and overvalued tech stocks are particularly vulnerable. However, to call it a bear market is still premature. This round of pressure resembles more of a structural valuation correction, not a systemic collapse. Assets with stable cash flows and reasonable valuations may actually perform relatively better. Only when the bond market is truly disordered will the structural adjustments tip into an all-encompassing bear market. Gold and Bitcoin find themselves in completely different situations. The logic behind gold is clear: rising credit premiums, central banks' continuous purchases of gold, and escalating geopolitical risks are all traditional triggers for buying gold. In the medium to long term, gold is favoredbut that does not mean it is the right time to chase prices; it is more akin to credit insurance in a portfolio, not a short-term tool. Bitcoin is often packaged as "digital gold," but its pricing logic is more similar to high-beta liquidity assets. It performs well during periods of loose liquidity and declining real rates. Currently, with high real rates and tight liquidity, this environment is unfriendly to Bitcoin. If the Fed is forced to pivot to easing, then Bitcoin would truly benefit; at this stage, it resembles more of a bet on a policy shift rather than a reliable safe-haven asset. Looking ahead six months: policy will contain volatility, while fiscal pressures will persist. In the future, either the bond market will continue to deteriorate, or some tools will be employed to comfort investor anxiety in the six months leading up to the midterm elections. These two paths are not mutually exclusive; a more likely sequence is that policy will first stabilize volatility, followed by a resurgence of fiscal pressure. The upcoming six months are precisely the window before the midterm elections. The baseline expectation is that policy will curtail disorder but not lower the interest rate averages. The Treasury and the Fed are likely to collaborate using toolsmore repurchases, regulatory easing (such as adjustments to the SLR), and more active verbal guidance. The goal is to suppress market volatility and prevent disorder in the bond market before the elections. Risk triggers include a sustained deterioration in Treasury auctions, a rapid increase in the MOVE index, or concentrated deleveraging in trading. Once these signals emerge simultaneously, the scenario of temporary easing will be disrupted. Conclusion The rise of a few basis points in the 30-year U.S. Treasury is not the focal point. Treasury repurchases can soothe the market, AI investments can explain part of the capital pressure, and Fed communication will influence short-term volatility. However, none of these are fundamental solutions. The core determinants of long-term interest rate averages still involve fiscal deficits, debt supply, long-term buyers, and the credibility of the U.S. dollar. The market is beginning to confront a previously overlooked issue: while U.S. debt can continue to expand, it is not without consequences. The era of low interest rates provided ample valuation space for growth stocks, long-duration assets, and distant cash flow narratives. Now, that space is narrowing. For the next six months, it is likely to be characterized as surface calm, underlying tension. Policymakers will seek ways to stabilize sentiment, but the issues of deficits and debt supply will not disappear into thin air. This bond crisis is far from over. It has merely taken on a quieter form, continuing to exist.