The first occurrence of this century! US Treasury bonds repeat the major sell-off of 1995, with soft landing and Trump as key factors

After the Federal Reserve announced a significant 50 basis point rate cut last month, investors' expectations of a soft landing have increased. Coupled with the possibility of Trump's re-election, U.S. Treasuries have experienced a massive sell-off unprecedented since the beginning of the 21st century.

According to a report by Bloomberg on Tuesday, the last time such a large sell-off of U.S. Treasuries was seen was in 1995, during Alan Greenspan's tenure as Fed Chairman leading the Fed through a soft landing period.

The report pointed out that since the Fed's first rate cut in four years on September 18, the yield on the two-year U.S. Treasury, sensitive to interest rates, has risen by a cumulative 34 basis points. In 1995, a similar significant increase in the yield of two-year U.S. Treasuries was also observed when the Fed successfully cooled the economy without causing a recession.

Steven Zeng, an interest rate strategist at Deutsche Bank, commented that the recent rise in U.S. Treasury yields "reflects a reduced probability of an economic recession" and that the economic "data is quite strong. The Fed may slow down the pace of rate cuts."

Some U.S. economic data released this month, including non-farm payroll reports and retail sales, have been better than expected, reducing market concerns about an economic hard landing. An article from Wall Street News more than a week ago mentioned that the current global market situation is to forget about a hard landing, trade for inflation again, and be wary of Trump.

The article stated that Citigroup analyst Dirk Willer believes that market concerns about an economic hard landing have been replaced by expectations of inflation again. An inflationary market is favorable for risk assets and the U.S. dollar, but unfavorable for long-term bonds.

Recent market pricing has reflected bets on rate cuts cooling down. On Tuesday, swap contract pricing showed that traders expect the Fed to cut rates by a total of 128 basis points by September next year, compared to their forecast of a 195 basis point cut a month ago.

Last Friday, the U.S. federal government announced a fiscal deficit exceeding $1.83 trillion for the 2024 fiscal year, the third highest on record, only surpassed by the two years during the COVID-19 pandemic. The market is increasingly concerned that the government's budget deficit will expand after next month's U.S. election. On Monday, three regional Fed presidents all expressed support for gradually cutting rates, slowing down the pace of action after the significant rate cut in September, collectively driving up U.S. long bond yields.

On Monday, the yield on the U.S. 10-year benchmark Treasury bond rose by more than 10 basis points, reaching over 4.20% during the day, and on Tuesday briefly approaching 4.22%, continuing to refresh intraday highs since the end of July.

Some commentators have suggested that in addition to investors no longer expecting the U.S. economy to fall into recession, the recent sell-off of U.S. Treasuries may also reflect a shift on Wall Street. Investors are now hedging against the possibility of Trump's re-election in November and the Republican Party winning a majority in both houses of Congress. This is because according to Trump's policy plans, he will implement tax cuts and increase fiscal spending once in office Bond investment giant Pimco's portfolio manager Mike Cudzil said on Tuesday that the recent trend in US bonds is mainly due to strong economic data over the past month and a half, as well as concerns about the election prospects. Solid economic data has led to a repricing in the bond market, as it has forced investors to reduce expectations of significant interest rate cuts. The higher bond yields now also reflect the "greater" possibility of Republican dominance in the election, which would be beneficial for the stock market but put pressure on long-term bond yields.