How do you view the recent sale of US bonds? UBS: The main reason is that the probability of a

Wind Chase Trading Station

The US bond market has experienced violent fluctuations recently. The yield on 2-year US bonds has soared by 42 basis points in the past month, and the 10-year and 30-year US bonds have exceeded the psychological marks of 4.3% and 4.5% respectively.

According to the Fengfeng Trading Station, in response to the hotly debated structural explanations such as "foreign capital withdraws from US bonds" and "US debt crisis", UBS's global interest rate strategy team pointed out in its latest report that the core driving force of this round of US bond sell-off is actually a cyclical factor - the probability of a "recession" in the United States is reduced, rather than a long-term structural risk that the market is worried about.

The probability of "economic recession" has decreased, and 2-year U.S. bonds have become the eye of a market storm.

UBS research report pointed out that structural explanations about the rise in long-term interest rates, such as the withdrawal of foreign capital and deficit concerns, are rampant, but by dismantling the yield curve, it is found that the current market volatility is mainly concentrated on the 2-year U.S. Treasury yield that reflects cyclical narratives.

Since April 30, the 2-year U.S. Treasury yield has soared by 42 basis points, mainly due to a 50 basis point decline in market expectations for the Fed's interest rate cut in 2025.

Meanwhile, the interest rate spreads of 2-year and 5-year, 5-year and 10-year and 10-year and 30-year yields have only flattened moderately, and these spreads have not fluctuated more than 10 basis points in the past month. This shows that this round of US debt volatility is mainly due to changes in the probability of "recession", rather than a lasting structural change.

Figure 1: Recent market volatility is concentrated in 2 years, showing that cyclical factors (declined recession probability) dominate selling

The structural pressure in the bond market is not obvious

In response to the hotly debated US debt crisis in the market, UBS pointed out that in the longer term, U.S. bonds have indeed undergone structural changes, but not in recent times.

UBS report shows that the current relationship between the two-year and five-year spreads and short-term interest rates has returned to the level before 2015, ending the extremely flat yield curve in the past decade relative to interest rate levels. But this relationship changes mainly occur in 2024, not in the near future. This shows that the steepening of the curve is a natural adjustment of the market mechanism, not driven by the debt crisis.

Figure 3: The interest rate curve pattern returns to pre-2015 levels; Figure 4: The "term premium" of US bonds climbs

UBS believes that at current levels, interest rates are unlikely to rise sharply, and a 30-year bond yield close to 5% may provide attractive entry opportunities for long-term investors. Short-term risks mainly come from CPI data that may rise in the coming months.

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