This is a follow-up to the article I posted yesterday.
I believe that the U.S. 10-year Treasury bond yield will inevitably rise rapidly in the near future.
The Trump administration is set to impose tariffs on March 4th, and it's uncertain whether they will be able to reduce U.S. fiscal spending by $1 trillion.
Additionally, the Federal Reserve’s interest rate decision is coming up in March.
One reason why I have doubts about the monetary policies of central banks around the world is that they seem overly reliant on data when deciding interest rates.
In my personal opinion, central banks should avoid being too far ahead or behind but instead predict exactly one step ahead when making decisions about benchmark interest rates.
As we all might expect, the unemployment rate in the U.S. is likely to rise.
In February, there was a large-scale deportation of immigrants, and many federal government employees were laid off or are expected to be laid off soon.
As a result, the unemployment rate in March could reach 4.1~4.2%. Based on such data, there may be growing expectations that the Federal Reserve will cut interest rates in March.
I think this expectation is one of the reasons why the U.S. Treasury bond yield recently dropped to 4.3%.
Now, let’s assume that the Fed lowers interest rates on March 19th, relying solely on the rising unemployment data. What might happen?
Japan is scheduled to make its interest rate decision on March 20th, and inflation in Japan has been rising sharply.
There’s a very high probability that Japan will raise its benchmark interest rate on March 20th. Let’s assume that the Bank of Japan raises interest rates (while the U.S. cuts them).
If this happens, the U.S.-Japan interest rate spread could narrow to below 3.5%, which might lead to yen carry trade unwinding within about a week.
Under normal global economic conditions, risk-averse behavior triggered by yen carry trade unwinding would push funds into safe-haven assets like U.S. Treasuries, causing Treasury yields to fall.
However, if the dollar weakens against the yen, instead of funds flowing into U.S. Treasuries, capital might flow into other inflation-hedging assets like gold or oil.
(That’s why I mentioned in another post that I’m betting on rising gold and oil prices.)
Of course, this is all hypothetical, based on assumptions about what might happen. But considering these factors, I wanted to explain why I believe the U.S. 10-year Treasury bond yield will eventually rise.
To navigate the current complex global situation, I think a combination of policies—keeping interest rates steady, reducing fiscal spending, and cutting taxes—needs to be implemented.