US Treasury Bonds Enter Prolonged Range... "2-Year Yield Expected Around 0.15%"

The Fed Implicitly Implements Control Policy... "Current Level of Base Rate to Be Maintained for the Time Being"

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[Asia Economy Reporter Minwoo Lee] An analysis has emerged that U.S. Treasury bonds have entered a long-term box range. This is because the Federal Reserve (Fed) and other government bodies are implicitly implementing policies to control yields. It is forecasted that the 2-year Treasury yield will fluctuate within ±10bp (1bp=0.01%) around 0.15% in the future.

On the 24th, KTB Investment & Securities analyzed that despite unfavorable domestic and international supply and demand conditions for U.S. Treasuries, they are maintaining a stable trend at a low level.

In fact, the 'selling parade' of U.S. Treasuries is at an unprecedented level. Internally, pension funds are reducing their holdings of U.S. Treasuries, and externally, foreigners are selling U.S. Treasuries. According to the Treasury International Capital (TIC) report released by the U.S. Treasury Department, foreigners net sold about $300 billion (approximately 372.15 trillion KRW) of long-term U.S. Treasury bonds in March alone. This is the largest amount since statistics began to be compiled and is extraordinary compared to past records. Researcher Heo Jeong-in of KTB Investment & Securities explained, "Due to the limited room for U.S. Treasury declines and rising dollar hedging costs, even foreigners are avoiding U.S. Treasuries."

Nevertheless, yields are maintaining a stable trend at low levels. Since the end of March, when the Fed implemented emergency rate cuts and Treasury purchase lending programs in response to COVID-19, the U.S. 10-year Treasury yield has fluctuated very narrowly within the 0.60~0.70% range. This is interpreted as the Fed absorbing the flood of supply. The Fed stabilized yields downward by purchasing U.S. Treasuries sold by domestic and foreign institutions, and after market yields stabilized within the desired range, the Fed reduced its Treasury purchases.

Short-term (2-year) yields are also staying within limited levels. They are fluctuating about 5bp higher than the U.S. Interest on Excess Reserves (IOER) rate of 0.10%. Therefore, it is judged that the Fed is implementing an implicit and practical yield curve control (YCC) policy. Researcher Heo said, "A similar trend appeared from 2011 to 2014, during which yields fluctuated within a 0.5 percentage point range except for periods of sequential level-downs. The Fed combined strong forward guidance with asset purchases, increasing Treasury purchases to stabilize yields downward whenever slight upward pressure occurred."

KTB Investment & Securities forecasts that, assuming the Fed does not introduce negative interest rate policies, the current benchmark rate level (0.00~0.25%) will be maintained until the end of next year. This is because raising the benchmark rate during a brief rebound period without confirming a long-term recovery of growth could quickly reverse the economic cycle into a downturn.

This stance becomes clearer when compared with the unemployment rate. In the past, the Fed raised benchmark rates immediately after the unemployment rate peaked and partially stabilized. However, remembering that this process slowed economic recovery, the Fed maintained a 0% benchmark rate (0.00%~0.25%) for seven years until December 2015 after the 2008 financial crisis. This is why some forecasts suggest the 0.00% benchmark rate will continue for the next five years.

Therefore, KTB Investment & Securities expects that if a 0% benchmark rate is assumed until the end of 2021, the 2-year yield will move within ±10bp around 0.15% throughout this year. The 10-year yield is expected to fluctuate within ±10bp around the current level of 0.65% until the end of the first half, and from the second half, the target range will be raised to 1.20%, but the upper limit is capped.

Researcher Heo predicted, "For the U.S. 10-year Treasury, supply and demand conditions are unfavorable, including increased issuance, and there is upward pressure on yields from mid-second half economic indicator improvements. However, considering that since 2011, during three small cycles, the Fed controlled the real yield of the 10-year Treasury not to exceed 1.00% when the economy bottomed out, and the International Monetary Fund (IMF) forecasted U.S. inflation at 0.6% this year, the upper limit will be capped at 1.20%."

This content was produced with the assistance of AI translation services.