On Monday (April 12th), U.S. Treasury yields surged, with the prospect of the Federal Reserve accelerating policy tightening and inflation concerns driving further selling of U.S. Treasuries. Treasury yields move in the opposite direction to prices. The 10-year Treasury yield rose to 2.78%, the highest level since January 2019. The 20-year Treasury yield broke through 3%, reaching 3.0011%, the highest level since May 2020 when the U.S. Treasury Department resumed issuing 20-year Treasuries.

The relentless selling of U.S. Treasuries continued on Tuesday, which may mark the end of a 40-year bull market in bonds, at least according to one key indicator. The 10-year U.S. Treasury yield rose above 2.80%, the highest level since December 2018, with traders betting that the Federal Reserve will step up its pace to tighten policy to curb inflation. Data shows that the upward trend in interest rates will break through 2.83% — threatening the last line of resistance for the bull market. The 30-year U.S. Treasury yield rose to 2.86%, the highest level since May 2019.

The rise in Treasury yields has reduced the attractiveness of stock valuations, especially for long-term growth stocks. Higher Treasury yields will significantly increase market financing costs, and new technology companies, which are highly dependent on financing, face considerable pressure. U.S. CPI data may further push up U.S. debt, with U.S. inflation continuing to reach a 40-year high.

At the same time, higher Treasury yields force the Federal Reserve to accelerate the pace of rate hikes and increase the magnitude of rate hikes. Otherwise, the entire financial market will face problems. In particular, commercial banks will experience a liquidity crisis. Furthermore, the rise in Treasury yields indicates that inflation is about to worsen, and the stock market bubble is about to burst. One indicator has reached an astonishing level. On Tuesday (April 12th), the U.S. Dollar Index, which measures the dollar against six major currencies, was at 100.11, testing the near two-year high of 100.19 set last week. The revaluation of the dollar, the global reserve currency, is likely to accelerate the flow of global dollar assets back to the United States and exacerbate the liquidity risks faced by emerging market economies, and corporate financing costs will also become more expensive as a result.

As the most important global reserve currency, every move of the dollar often has significant implications for the financial market. Amid the current tide of global central bank tightening, the revaluation of the dollar is likely to accelerate the flow of global dollar assets back to the United States and exacerbate the liquidity risks faced by emerging market economies, and corporate financing costs will also become more expensive.

It has been noted that as of the close on April 11th, the yield on the active 10-year Chinese government bond was reported at 2.7402%, while the yield on the 10-year U.S. Treasury bond broke through 2.78%. The market referred to this as an inversion of the China-U.S. 10-year government bond yield spread, the first time since 2010. The term "inversion" is not accurate. The precise statement is that the yield on the 10-year government bond in the United States is higher than in China. Essentially, there is no comparability between Chinese and U.S. interest rates, including government bond yields, because the financial environment and price formation mechanisms are too different.

However, if a comparison must be made, it must be under the conditions of a completely free market and fully open finance. Then, first, the dollar will appreciate, the U.S. Dollar Index will rise, the renminbi exchange rate against the dollar will continue to depreciate, and then international capital will flow out. If there are real estate and financial bubbles, they will be burst. On April 12th, according to the China Foreign Exchange Trade System, the midpoint rate of the renminbi against the dollar was reported at 6.3795, depreciating by 150 basis points.

Secondly, the dilemma of the People's Bank of China's monetary policy will intensify. Insufficient domestic consumer demand, with the PMI falling below the boom-bust line, calls for a loose monetary policy, interest rate cuts, and reserve requirement ratio cuts to stimulate the economy. However, China's interest rates are lower than those in the United States, bringing depreciation pressure to the renminbi exchange rate, and also requiring that credit cannot be expanded. What should be done?

Fiscal and tax policy adjustments should take the lead in regulating the economy. The implementation of policies such as tax rebates, tax cuts, fee reductions, financial structural support for the real economy, the issuance and use of special bonds, the commencement of construction of key projects, and support for enterprise job stability should all be arranged ahead of schedule and accelerated.