Oil prices fall below 100 yuan+Besent calls out, U.S. Treasury yields retreat from 2002 highs

According to Zhihui Finance APP, U.S. Treasury yields have retreated from their highest levels since 2002, as oil prices fell below $100 per barrel and U.S. Treasury Secretary Scott Besant insisted that the government debt burden is manageable. The yields on 10-year and 30-year U.S. Treasury bonds dropped by 3 and 4 basis points, to 5.27% and 5.63% respectively, while the 2-year yield remained largely unchanged. On Tuesday, oil prices declined as signs emerged that more crude oil is being supplied through the Strait of Hormuz.

This signals a pause in the global bond market sell-off, which previously continued due to concerns over inflation triggered by conflict between the U.S. and Iran, and a rising expectation of further monetary tightening by the Federal Reserve.

Besant attempted to reassure investors, stating that a combination of economic growth and spending restrictions will “soon” begin to change the U.S. government’s borrowing trajectory. In a fireside chat in Pennsylvania on Monday evening, he said the government would start “reversing this trend.”

Voices of Doubt: Deficit Unsolved, Reassurance Falls Short

Nevertheless, the market remains skeptical of Besant’s statements and is reluctant to declare that the bond market sell-off has ended.

Macquarie strategist Gareth Berry commented: “Given the deficit is as high as 6% and there are no plans to cut the deficit, the market may remain very doubtful. Speaking about targets is not the same as having a plan.”

Schroders fund manager James Ling said he is focused not only on crude prices. “To see a meaningful rebound across the entire curve, the primary condition is for energy prices to start falling,” he said. “It’s not just about crude oil prices, but also refined product prices.”

Additionally, Bridgewater founder Ray Dalio warned that the U.S. is approaching the limit of the debt cycle and, if spending continues to exceed earnings, may face a crisis within three years. He said U.S. Treasuries are vulnerable to decreased demand from China and Japan (the two largest foreign holders of U.S. debt).

However, HSBC strategists believe the market’s bet on roughly 80 basis points of Federal Reserve rate hikes by 2027 is “excessive,” but they still maintain that the yield spread between 5-year and 30-year U.S. Treasuries will widen. HSBC U.S. rates strategist Dheeraj Narula wrote in a report: “We believe that surging volatility, combined with historical data showing a lack of clear technical resistance at these levels, has led many investors to adopt a wait-and-see stance, although the appeal of higher long-term yields is increasingly evident.”