China Securities Co., Ltd.: Weak demand for U.S. Treasury bonds triggers selling spree, market attention on global U.S. dollar cycle trend.

China Securities Co., Ltd. issued a research report stating that the impact of tariff policies on global capital markets is still gradually spreading: from the depreciation of US asset pricing to the depreciation of global asset pricing, and recently, the significant rise in US long-term bond yields has led to a storm in the US bond market. The three underlying factors behind the recent US bond storm are: trigger factors, weak demand for 3-year US bond auctions, leading to market concerns about subsequent 10-year and 30-year bond auctions. US long-term bond yields are rising, while short-term bond yields remain stable. Boosting factors include a significant drop in global risk assets, increased volatility in US bonds, forced closure of leveraged basis trading positions, and a tightening liquidity situation in the US bond market. The underlying factor is the market's concern about the direction of global USD circulation amid global order restructuring. The views of China Securities Co., Ltd. are as follows: 1. The US bond storm is rapidly approaching. In the first two trading days of the week, US bond yields rose sharply by close to 30 basis points, sparking a new wave of selling in the US bond market. After the US announced comprehensive tariff policies on April 2, US bond yields initially declined as a safe-haven demand, with the 10-year US bond hitting a low of 3.86% on April 4. Since then, long-term US bond yields have started to rebound significantly. In the two trading days of April 7 to 8, US bond yields rose sharply by nearly 30 basis points. This magnitude of increase in US bond yields indicates a recent wave of selling in the US bond market. Firstly, the selling of US bonds is not due to economic improvement, as risk assets are plummeting. The tariff policies disclosed by the US significantly impact risk appetite, increasing uncertainty in global economic growth. Global stock markets, led by the US, are falling, and commodities are also declining. The simultaneous drop in risk and safe-haven assets indicates that the market is pricing in short-term liquidity tightness. This also indirectly suggests that the impact of tariffs on global assets has spread from simple risk preferences to liquidity shocks. 2. The catalyst for the US bond storm. The lackluster demand shown in the results of the government bond auctions is the main trigger for the US bond storm. The results of the US 3-year bond auction on April 8 showed a bid-to-cover ratio of only 2.26, the lowest level since April 2023. At the same time, the dealer takedown ratio reached 20.7%, the highest since 2024. After the results of the 3-year bond auction, the market is concerned that the demand for the subsequent 10-year and 30-year bond auctions will also be weak. As a result, US long-term bond yields have risen significantly. Deleveraging actions by basis trading are also boosting the rise in long-term bond yields. Under the impact of tariffs, stagflation concerns are rising, and risk assets are experiencing high volatility, leading to significant fluctuations in US bond volatility. Leveraged basis trading funds have had to partially unwind, resulting in the significant volatility in US bond yields. 3. Behind the US bond storm, the market is truly concerned about the direction of global order restructuring. The US bond storm is primarily pricing in the liquidity shock caused by tariffs. The unexpectedly high impact of tariffs could seriously affect global economic growth, including that of the US, potentially leading to a new recession. Global risk assets, including US stocks and commodities, are dropping significantly. The US is facing a more complex economic environment, with the possibility of stagflation making a comeback, potentially rekindling the historical struggles of the 1970s. Therefore, the fluctuations in US bonds are more intense. The drop in risk assets and the increased volatility in US bonds have led to a tightening of liquidity. The true focus of the market is on the global order restructuring under the impact of tariffs. The current round of tariff negotiations is different from those in recent history, as it signifies a reshaping of global order and rules. With a lack of clarity on a new global order, capital markets are pricing in uncertainty. The direction of USD liquidity circulation in the process of rebuilding a new global order is shrouded in confusion. Especially since China has been reducing its holdings of US bonds since 2012, with the pace of reduction accelerating in recent years. From this perspective, the market can understand the underlying concerns hidden behind the current US bond storm. The impact of tightening monetary policies in Europe and the US could exceed expectations, dragging down global economic growth and the performance of asset prices. Geopolitical conflicts still pose uncertainties, disturbing the prospects for global economic growth and market risk appetite. Global tariff policies are fraught with uncertainty, as tariffs could hinder global economic growth and impact the performance of asset prices.