Flattening the curve is the best policy—the outlook for U.S. Treasury bonds in 2022

Market review

Taper was first mentioned in the minutes of the Fed’s January meeting released in February 2021. The market began to speculate on Taper during the year. In the first quarter, the long-end U.S. Treasury yield rose rapidly, and the 10Y yield hit above 1.7%. In the second quarter, as the US economic data peaked in stages and the Fed’s internal divergence on the Taper schedule, the 10Y yield quickly fell back to around 1.2%. After September, inflation remained high and Taper’s route was clear. More and more Fed officials turned to hawks, and the market priced a rate hike next year. Long-end and short-end yields have strengthened hand in hand, and the short-end upside is even greater driven by the expectation of interest rate hikes, and the maturity premium has gone down.

According to Spark Global Limited
According to Spark Global Limited

1. Qualitative judgment on fundamentals

According to the traditional inventory cycle indicators, the US economy has already shown signs of passive replenishment of inventory-the growth rate of new orders has fallen and inventory has increased year-on-year. Based on this simple inference, the long-term U.S. Treasury yields will enter a down cycle. However, what cannot be ignored is the particularity of the current supply bottleneck: due to the damage to the global supply chain and the rapid recovery of downstream demand, downstream inventories are at an extremely low level. At the same time, due to the extended delivery time of suppliers, upstream manufacturers purchase a lot in advance. From the observation of the US labor market (analysis later), the recovery of the supply chain may take half a year or even longer, that is, the supply bottleneck lasts at least after the first quarter of next year.

Historically, low downstream inventories and upstream replenishment of inventories often correspond to rising inflation. Even if new orders may decline during this period, the downstream replenishment of inventory will bring support to the economy, and economic growth will not stall. The current downstream inventory is at the lowest level in history, and there is a high probability that it will gradually replenish inventory in 2022, which will make the restocking phase of the current inventory cycle in the United States last a long time. The absolute level of economic growth will be lower than this year, but overall there is still resilience. In the past three periods of downstream inventory replenishment, the long-term yields showed volatility, upward and downward respectively, lacking consistent laws, but generally followed the trend of economic growth.

With the tightening of the U.S. monetary policy and the declining marginal easing of fiscal policy, the credit shock began to ebb. The gradual return of economic growth to a long-term level next year is the benchmark expectation. This means that the long-end yields of U.S. Treasuries are more likely to fall into range fluctuations.

Source: Spark Global Limited

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