According to reports, data released by "FedWatch" on August 9 indicated that the probability of the Federal Reserve raising interest rates by 50 basis points in September is 32%, while the probability of a 75 basis point increase is 72%. A day prior, Federal Reserve Governor Bowman continued to sound hawkish, stating, "The Federal Reserve should consider raising interest rates by 75 basis points multiple times in future meetings until inflation is under control, in order to bring the high inflation rate back down to the Federal Reserve's target."

The U.S. Bureau of Labor Statistics' report released on August 5 unexpectedly showed a strong increase in employment for July, more than double the expected 250,000 jobs, suggesting that the Federal Reserve will continue to expand its aggressive monetary policy to curb inflation.

This also led to a decline in U.S. Treasury yields, with Wall Street continuing to digest the unexpectedly strong employment report. At the same time, attention is closely focused on the highly anticipated July inflation data to be released on August 10, looking for clues on the extent of further interest rate hikes by the Federal Reserve. Wall Street expects the July CPI to slow down to 8.9%, down from the previous value of 9.1%.

Advertisement

On August 9, the benchmark 10-year U.S. Treasury yield fell to 2.81%, and the two-year U.S. Treasury yield fell to 3.216%. Meanwhile, the yield spread between the two-year and 10-year U.S. Treasuries reported a negative 46 basis points, marking the most severe inversion of this yield curve since 2000.

The pressure on U.S. Treasuries is far from over. Economists believe that the Federal Reserve's significant interest rate hikes will increasingly risk triggering a U.S. economic recession. U.S. GDP growth has already seen negative growth for two consecutive quarters this year, which will pose an upward risk to U.S. Treasury yields. Bond prices are inversely proportional to yields, and a rise in yields indicates that bonds are being sold by buyers.

Data monitored on August 8 showed that in the three weeks ending August 2, U.S. Treasury investors net sold a staggering $65.1 billion in U.S. Treasuries as yields continued to decline.

What worries Wall Street even more is that the Federal Reserve also began selling U.S. Treasury assets at a scale of $95 billion per month starting in August (quantitative tightening), which will further suppress long-term U.S. Treasuries.

Not only that, but according to the latest report released by the U.S. Department of the Treasury, although the demand from private investors for U.S. Treasuries continues, global central banks have net sold a high of $180 billion in long-term U.S. Treasuries for the fourth consecutive month since the beginning of the year.

In fact, according to the U.S. Department of the Treasury's report, over the past three years, the total amount of U.S. Treasuries net purchased by global central banks has not been proportional to the amount of money printed by the United States in a massive monetary easing. For specific data, please refer to the chart.So, as the U.S. federal debt and inflation surge simultaneously, a reset of the dollar's role in the global monetary system will occur when central banks around the world need to address the risks associated with U.S. debt. Although the Federal Reserve has already initiated an interest rate hike process, it still cannot turn the real yield of U.S. Treasury bonds into a positive data value.

It should be noted that the official U.S. Treasury bond holdings report published by the U.S. Treasury Department will have a two-month delay (currently only up to May of this year, the next report will be released on August 17). However, as the yield on the 10-year U.S. Treasury bond has risen from 2.68% at the end of May to around 2.9% currently, we expect to see more sales by central banks in the upcoming June and July reports.

This is because, with the continuous surge in the supply of U.S. bonds and high inflation lasting for several months, the nominal yield of U.S. Treasury bonds, after being adjusted by inflation data, is actually in a negative range, leading to a decrease in the attractiveness of U.S. bonds relative to foreign bonds. On the other hand, as the U.S. dollar interbank lending rate rises, inflation at a 41-year high has already offset part of the returns on U.S. Treasury bonds.