A recent research report from China Merchants Securities Co.,Ltd. highlights that the sustained rise in US Treasury yields, which has broken through 4.7%, is primarily driven by an expansion in the term premium. This movement underscores the dual pressures of an imbalance in the supply and demand for long-dated US debt and a rising fiscal risk premium. While the Treasury's expansion of long-dated bond buybacks sends a stabilizing signal and can improve local liquidity in the long end, its substantive impact is limited and does not resolve the medium-to-long-term structural issues facing the US bond market. In the near term, the focus will be on this week's global central bank symposium, where the key question is whether Kevin Warsh's remarks can restore market confidence in the Federal Reserve's policy direction.
As long as the risk of rising US Treasury yields persists, gold is likely to experience high volatility, serving as a crucial hedge against portfolio risk. In the equity market, a balanced allocation combining dividend-paying stocks and small-cap growth is recommended. The report identifies three key scenarios for the upcoming central bank event, each with distinct implications for rates, the dollar, and risk assets.
Understanding the Surge in US Treasury Yields
The recent rapid ascent in US Treasury yields is mainly attributable to the term premium, reflecting disruptions in the liquidity of long-term US bonds and a higher fiscal risk premium. On the supply side, the quarterly auction sizes for medium and long-term Treasuries have remained stable, with limited marginal increases. However, on the demand side, net purchases of long-dated US Treasuries by investors have been steadily declining. This is partly due to waning confidence in US fiscal and monetary policy, and partly due to the crowding-out effect from massive bond issuance by leading AI companies, which compete for the same long-duration capital. Since the start of 2026, the total issuance of long-term bonds by major CSP firms has been several times higher than in previous years.
The Treasury's Policy Response and Its Limited Impact
The US Treasury's announcement to expand its long-dated bond repurchase operations is seen as a move akin to the Federal Reserve's Operation Twist. It does not inject additional liquidity but aims to support demand for long-term bonds by shortening the weighted average duration of outstanding Treasuries. Given that the buyback size remains modest compared to monthly issuance volumes, the policy's significance is more about signaling than substance. It is unlikely to resolve the medium-to-long-term challenges of high inflation, AI-driven bond supply, and debt sustainability. With US interest payments now consuming 22.74% of government revenue, high deficits and high interest rates are reinforcing each other, perpetuating the fiscal risk premium.
Outlook for Gold and A-Shares
In the short term, gold pricing is expected to oscillate between the influence of real US yields (liquidity) and the longer-term narrative of a weakening US dollar credit. After a significant rebound, gold may experience high-level volatility in the near future. As long as the US yield risk remains unresolved, gold will remain an important tool for hedging portfolio risk.
For China's A-share market, increased volatility and short-term pressure are anticipated as the focus shifts to structural opportunities driven by earnings. A more balanced style rotation is expected, favoring a combination of dividend and small-cap growth stocks. Sector-wise, a balanced allocation across three themes is advised: technological innovation, corporate overseas expansion, and a rebalancing of traditional undervalued sectors. A key contradiction for the AI sector is the race between strong earnings data (numerator) and financing constraints (denominator).
Key Scenarios for the Global Central Bank Symposium
Scenario one involves ambiguous communication, focusing only on a reform framework while avoiding specific policy triggers. This could lead to stable short-end yields, higher long-end yields, a weaker dollar, outperformance of defensive stock sectors, and a stronger gold price. In scenario two, a hawkish stance emphasizing the commitment to fighting inflation while retaining the option to hike rates would likely push short-end yields up, potentially lower long-end yields, strengthen the dollar, and pressure stocks in the short term. However, a subsequent fall in long-term rates could aid a mid-term recovery in equities, while gold would face headwinds.
Scenario three, a neutral-to-dovish tone, would involve a clearer policy reaction function, hinting at future policy easing. This could lead to a decline in US yields, a weaker dollar, a stock market recovery, a rebound in previously pressured tech stocks, and a rise in gold prices. It is important to note that if long-term US yields surge further, it could force the Treasury to adopt more forceful stabilizing measures. Given the government's ample policy toolkit, this could eventually lead to a significant pullback in yields from highs, potentially presenting a better investment opportunity for the market, even if medium-to-long-term issues remain unresolved.
Risk Warnings
Risks include economic data falling short of expectations, an incomplete understanding of policy, and a more aggressive-than-expected tightening of overseas policies.