Due to the 10-year U.S. Treasury yield reaching a high of 4.5%, the market anticipated a more moderate and gradual approach to policy implementation, and the two-month-long U.S. Treasury sell-off has finally come to a halt.

Currently, many investors are once again preparing to bottom-fish in U.S. Treasuries. On Monday, during the Asia-Pacific trading session, the 10-year U.S. Treasury yield was reported at 4.34%, continuing to decline. The market still expects the U.S. Treasury rebound to be sustainable.

The U.S. Treasury sell-off finally fades

After two months of selling, the U.S. bond market has finally stopped falling and stabilized. On one hand, whenever the U.S. Treasury yield tests new peaks, investors start to buy heavily. Since mid-September, a series of economic data stronger than expected has led the market to reduce bets on Federal Reserve rate cuts, and the short-term sentiment of "trading" has significantly pushed up the 10-year U.S. Treasury yield. After the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," broke through 4.5% on November 15th, investors bottom-fished again, and the yield quickly reversed.

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On the other hand, last Friday, the CEO of the macro hedge fund Key Square Group, Bessent, was nominated as the next U.S. Treasury Secretary. Bessent stated that he would support tariff and tax cut plans, but investors expect him to prioritize economic and market stability over political points. He had previously questioned the government's management of federal debt financing and criticized the Federal Reserve's significant rate cut in September, being regarded by Wall Street as a "fiscal hawk," and is expected to play a key role in overseeing the government's large-scale bond offerings.

Brian Jacobson, Chief Economist at wealth management firm Annex Wealth Management, said to the media, "Bessent is expected to bring a sense of near-gradualism to the government, rather than adopting a 'big bang' approach to drive significant policy changes. Based on this, the market may be able to breathe a sigh of relief."

The combined effect of the above two factors led to the 10-year U.S. Treasury yield closing at 4.4% last Friday, down 3 basis points from the previous week's close. This week, with Thanksgiving approaching, the U.S. financial market is about to迎来 a short trading week: U.S. stocks and bonds will be closed all day on Thursday, and will close early on Friday. However, in this short trading session, the market will still welcome the Federal Reserve's most important inflation indicator (PCE) price index and the Federal Reserve's November meeting minutes on the 26th and 27th, respectively, which may cause more market turmoil at the end of November. Currently, industry insiders generally expect that the latest inflation data to be released this week may show that U.S. price pressures remain stubborn, which will reinforce the Federal Reserve's cautious attitude toward future rate cuts. The median forecast from a survey of economists shows that the U.S. October PCE price index may rise by 2.3% year-on-year, higher than September's 2.1%; the October core PCE price index, excluding food and energy, is expected to rise by 2.8% year-on-year, possibly recording the largest year-on-year increase since April.

Jun, a U.S. economist at Bank of America Securities, wrote in a research report that the expected PCE data "will lead the Federal Reserve to re-evaluate inflation and policy prospects," "Nevertheless, we still expect the Federal Reserve to cut rates by 25 basis points in December, but given the resilience of economic activity and the stubbornness of inflation, the risks seem to be tilting towards a shallower rate cut cycle."

According to the FedWatch tool of the Chicago Mercantile Exchange, the market estimates a 44% chance that the Federal Reserve will not cut rates at the December meeting, higher than the 29% a month ago.

The negative correlation between U.S. stocks and bond returns

Bronnie, Managing Director and Multi-Asset Portfolio Manager at global bond giant PIMCO said that the exact trajectory of the Federal Reserve's monetary policy may differ, but the Federal Reserve and most major central banks have clearly stated their intention to lower interest rates to a neutral level. Analyzing the performance of the U.S. Treasury market during historical rate cut cycles reveals that U.S. Treasury returns have always been positive during a series of macroeconomic environments within the Federal Reserve's rate cut cycle. As the Federal Reserve continues to cut rates, bond investors may benefit from the appreciation of U.S. Treasuries and obtain higher returns than money market funds. At the same time, she said, "U.S. Treasury bonds are an asset with very low volatility and high returns. Therefore, U.S. Treasury yields far above 4% are inherently attractive. If the 10-year U.S. Treasury yield returns to 5%, investors can bottom-fish more aggressively."

Furthermore, she believes that the negative correlation between U.S. stocks and bonds is returning, so U.S. Treasuries can also play a hedging role in the investment portfolio. "If the mainstream theme of asset allocation since the beginning of 2023 has been the return of bonds, then an emerging theme at present is correlation, that is, as inflation and economic growth slow down, the negative correlation between stocks and bonds reappears." She said, "This is good news for multi-asset investors. It means that stocks and bonds can complement each other in portfolio construction, and both may benefit from a soft landing baseline U.S. economic outlook under continued central bank rate cuts."