【MACRO Alert】 Global financial market turmoil: the changing dynamics of U.S. Treasuries and safe-hav

Recently, global financial markets have been in turmoil, with the U.S. Treasury market being the hardest hit, and the performance of safe-haven assets has also attracted attention.

Trouble in the U.S. Treasury Market

The U.S. Treasury options market showed an "extremely bearish" tilt, with the cost of put protection soaring to a new high since the flash crash in 2021. The U.S. 2-year Treasury auction was cold, and foreign buyer interest plummeted to the lowest level since March 2023. This unease stems from many factors, including Trump's aggressive trade policies and his pressure on Federal Reserve Chairman Powell to cut interest rates, which may have an impact on the economy and markets.

At the same time, the challenging fiscal outlook in the United States has led traders to demand more compensation for the risk of holding long-term U.S. Treasuries, as reflected in rising term premiums. Investors have withdrawn positions amid market turmoil and policy concerns, further adding to the upward pressure on yields in recent trading days. JPMorgan Chase's weekly client survey showed that in the week ending April 21, neutral positions rose to the highest level this year, shorts were flat, longs fell by 5 percentage points, and outright bullish positions were now the fewest since February. Although positions in the options market may be quickly corrected, the current policy changes and uncertainty still make traders nervous.

Safe-haven assets and market risks

Under normal circumstances, uncertainty would prompt investors to flee to safe havens, but even some havens are no longer reliable. U.S. Treasuries have become a political bargaining tool in the Trump administration's trade war, leading many governments to sell off their bonds and sending yields higher rather than lower. Meanwhile, the dollar has continued to fall amid political and policy instability. Against this backdrop, gold has become the safe haven of choice for investors, with its price surging sharply this year. However, gold may also be at risk of losing its shine. The dollar and Treasury yields are usually closely correlated, but now that the dollar is weak and Treasury yields are rising, this disconnect is highly concerning, increasing the risk of further declines in stocks and bringing unpredictable tail risks. Traditional relationships between markets tend to solidify when market sentiment is tense and fear dominates, so analysts believe that U.S. Treasuries and gold may usher in a wave of corrections .

Risks of the Yen Carry Trade

The yen carry trade has become one of the major risks facing investors. In July 2024, the Bank of Japan raised interest rates for the second time and hinted at further rate hikes, while announcing a reduction in its planned monthly purchases of Japanese government bonds, a move that triggered a sharp rise in the yen. Traders who borrowed low-cost yen when the dollar was strong and used the money to buy other assets were under great pressure. After the Bank of Japan's rate hikes caused the yen to appreciate, these traders' positions suffered losses, and they were forced to unwind yen carry trades and had to sell stocks to close their positions, which was the reason for the yen-driven sell-off in US stocks last summer. Today, the USD/JPY exchange rate is hovering around the 140 level again, which is not only a psychologically important level, but also may trigger a wave of traders to close their yen positions, further accelerating the downward trend of global stocks.

Potential impact of Fed policy

As financial markets become turbulent, the Fed may take action to support economic growth and keep financial liquidity flowing. As the Fed's quantitative tightening slows down, if the US bond market remains unstable, it is reasonable to assume that the Fed may turn to quantitative easing. In this case, stock and gold prices will fall, and US Treasury bonds - especially long-term Treasury bonds - will once again become one of the important safety valves of the market . In short, the current global financial market is facing many challenges and uncertainties. Investors need to pay close attention to the performance of various assets and policy changes to make reasonable investment decisions.