Concerns over Debt Crisis Behind Rising Long-term Interest Rates on U.S. Treasuries

This week, the cryptocurrency market experienced significant fluctuations, with price trends showing an M-shaped pattern. As the new president is about to officially take office, the capital market has begun to weigh the opportunities and risks following his election, marking the end of a 3-month sentiment-driven market. Amidst the myriad of complex information, we need to identify the core of the short-term market game in order to make rational judgments about market changes.

Overall, high-growth risk assets, including the cryptocurrency market, may continue to be under pressure in the short term. The main reason is the widening term premium in the U.S. Treasury market, which has led to rising mid-to-long term Intrerest Rates, adversely affecting these assets. The fundamental reason for this situation is that the market is pricing in the potential debt crisis in the United States.

From a macroeconomic perspective, the U.S. economy remains strong. The ISM Manufacturing and Non-Manufacturing Purchasing Managers' Indexes continue to rise, indicating a relatively optimistic short-term economic outlook. In terms of the job market, non-farm payrolls have increased, the unemployment rate has decreased, job vacancies have risen, and initial jobless claims have continued to decline, suggesting that the job market remains robust and a soft landing is almost certain. Although inflation expectations have risen slightly, they remain within a reasonable range, and the market is not overly panicking about inflation.

However, the long-term interest rates of U.S. Treasury bonds continue to rise, exacerbating the bear steepening pattern. Taking the 10-year Treasury bond as an example, it has increased by about 20 basis points in a week. The rise in interest rates has a more significant impact on high-growth companies, mainly reflected in higher financing costs, pressure on valuations, and changes in investor preferences. In contrast, stable companies are relatively less affected.

The core factor causing the rise in long-term government bond interest rates is the increase in term premium. Estimates from the ACM model indicate that the term premium for the 10-year U.S. Treasury bond has recently risen significantly. Meanwhile, the MOVE index shows that the implied volatility of short-term interest rates has not experienced significant changes, indicating that the market is not sensitive to potential policy changes by the Federal Reserve. This suggests that the market is currently more focused on the medium to long-term development of the U.S. economy, particularly concerns regarding the fiscal deficit.

In the near future, when observing political information and stakeholders' viewpoints, it is essential to consider their impact on debt risk. For example, remarks made by the new president regarding the United States entering a national economic emergency may exacerbate trade war concerns, but from a direct impact perspective, the increase in tariff revenue is positive for U.S. fiscal income. In contrast, the progress of tax reduction legislation and how to cut government spending are the key points that deserve the most attention in the entire game.