Ever since the inflation data for January was released, it has not been a good time for U.S. Treasury bonds. Despite record issuance, the demand has been hard to describe, truly very dismal.

Is the demand for U.S. Treasury bonds plummeting? The Federal Reserve takes the blame?

According to the data, on Monday, the U.S. Department of the Treasury conducted an auction of U.S. Treasury bonds, but this auction was not only ignored, but also the issuance volume of U.S. Treasury bonds set a historical record, leading to a continued rise in U.S. Treasury bond yields.

U.S. Treasury bond issuance soars! But demand plummets?

As we mentioned earlier, at the end of last year, U.S. debt increased from $33 trillion to $34 trillion, and the issuance of this additional $1 trillion in U.S. Treasury bonds took only 3 months. This means that the issuance speed of U.S. Treasury bonds is accelerating.

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Just a few days ago, the U.S. Department of the Treasury issued 20-year long-term U.S. Treasury bonds, with this issuance scale being $16 billion. Unlike before, the "allocation ratio" of this U.S. Treasury bond issuance was only 59.08%, lower than the average of 68.2%.

The issuance of 20-year U.S. Treasury bonds by the Treasury Department is a "failure"

This figure means that the 20-year long-term U.S. Treasury bonds issued by the Treasury Department are "unwanted." Especially, overseas capital's interest in purchasing U.S. Treasury bonds is not high.

Why are there no takers for the 20-year U.S. dollar bonds? There are mainly two reasons.

The first reason is that the U.S. CPI and PPI for January were off the charts, with data exceeding market expectations by about 0.2%, and there was also an increase of about 0.4% month-on-month.CPI and PPI are both inflation indicators, and their growth implies that inflation in the United States is not only out of control but also experiencing an unexpected rebound, which will affect the Federal Reserve's future monetary policy. Reflected in the market, this means higher yields on U.S. Treasury bonds, and a lack of confidence in U.S. debt.

The U.S. CPI has rebounded, and the inflation crisis continues.

The second reason is that the outstanding U.S. debt itself is as high as $34 trillion, and the ever-increasing interest payments have plunged the U.S. finances into a "death spiral." Historically, although the U.S. dollar has always maintained its status as the world's dominant currency, its dominance is in constant decline.

To put it simply, the U.S. dollar used to be equivalent to gold, but now, while it remains the world's currency, it is much inferior to gold. Countries around the world have already begun to de-dollarize, albeit at varying paces. This has led to a lack of confidence in long-term U.S. Treasury bonds.

Since long-term U.S. Treasury bonds are not favored, how is the performance of short-term U.S. Treasury bonds? Surprisingly, it is quite average.

On Monday, the U.S. Treasury Department issued 2-year and 5-year Treasury bonds, which can be considered short-term U.S. debt. The scale of the Treasury auction was also very large.

The U.S. short-term debt auction was also not ideal.

Firstly, for the 2-year Treasury bond, the auction scale was $63 billion, setting a record for the highest issuance volume in the history of 2-year U.S. Treasury bonds, indicating a "very strong" desire from the U.S. Treasury Department to issue debt.

Due to the influence of the high interest rates set by the Federal Reserve, the final interest rate for this 2-year Treasury bond was 4.691%, significantly higher than the previous rate of 4.365%, with a tail spread of up to 0.2 basis points.

The appearance of a tail spread means that the market demand for U.S. Treasury bonds is very low, leading to a lack of interest in purchasing them. As a result, the issuer had to raise the interest rate to attract investors. The Treasury bonds that no one wanted to buy were taken up by U.S. insurance companies, banks, and government funds that collaborate with the Federal Reserve.Not only that, but the US Department of the Treasury has also issued 5-year US Treasury bonds, and the scale of this 5-year Treasury bond auction has set a historical record, reaching as high as $64 billion.

Short-term US Treasury bond auctions are not optimistic

After the issuance volume of 5-year US Treasury bonds reached a new high, their winning interest rate, like that of 2-year bonds, also rose, eventually reaching 4.32%, significantly higher than the previous market rate of 4.055%. This means that the tail interest rate is as high as 0.8 basis points, even higher than that of 2-year short-term debt.

The reason for this situation is actually the same as that of 2-year US Treasury bonds. The market believes that the US Department of the Treasury will continue to issue a large amount of US Treasury bonds in the future, and there is no shortage of funds willing to buy US Treasury bonds. Therefore, even if the Treasury raises interest rates, many overseas investment institutions will not easily take action, and may even sell US Treasury bonds.

The worse the performance of US Treasury bonds, the more China sells.

The difficulties in issuing US Treasury bonds are actually best understood by US Treasury Secretary Yellen, who was previously the Chairman of the Federal Reserve, and thus is most alert to the US debt crisis. She has warned about the debt crisis and stated that the US Treasury bond crisis could be the fuse for the bankruptcy of the United States, calling for control over the US government's deficit.

The US Treasury bonds issued by the US Department of the Treasury after 2020 are far higher than previous levels, and the current 2024 issuance volume has actually reached a peak.

Scale of Treasury bond issuance by the Ministry of Finance. In recent years, there has been a frenzy of bond issuance.

From the issuance of US Treasury bonds mentioned above, we can also see that as the global asset pricing anchor, the interest rate of 10-year US Treasury bonds has risen from around 3.9% previously to around 4.3%. This means that the performance of US Treasury bonds has deteriorated, and for China, it is an opportunity for us to continue selling US Treasury bonds.

In fact, starting a few years ago, China has been selling US Treasury bonds for considerations such as the safety of foreign exchange assets, with only a slight increase in holdings at the end of last year for two months.At the time, the reason we bought U.S. Treasury bonds was because the Federal Reserve signaled an expectation of interest rate cuts, leading to a surge in the value of U.S. Treasury bonds. Therefore, our purchase of U.S. Treasury bonds at that time was actually appropriate.

However, now with the release of the inflation data for January, even Americans themselves know that the Federal Reserve will delay interest rate cuts, causing the value of U.S. Treasury bonds to fall. American fund managers are beginning to liquidate their U.S. dollar holdings.

It is therefore quite evident to judge that in January 2024, the People's Bank of China and other central banks of major countries will choose to vote with their feet and start to sell off U.S. Treasury bonds in droves. We should see this data in March.

In the last year, China's holdings of U.S. Treasury bonds have been the latest at $816.3 billion.

In fact, the U.S. Treasury bond crisis has not always been present in history; it only began to emerge after 2020 in the United States. After 2020, the issuance of U.S. Treasury bonds saw a rapid increase, causing the U.S. Treasury Department to repeatedly set new records for bond issuance. The supply of U.S. Treasury bonds in the market has surged.

The more U.S. Treasury bonds are issued, the more bleak the overseas demand becomes, and the greater the liquidity threat. This will also allow countries, including China, to see the fact that U.S. Treasury bonds are in continuous decline, leading to the sale of U.S. Treasury bonds. If the Federal Reserve and the Treasury Department do not come up with some solutions to deal with this, the crisis of U.S. Treasury bonds will continue.

In summary, as the U.S. inflation crisis continues, U.S. Treasury bonds have gone from being sought after to being shunned. Coupled with the continuous issuance of a large amount of U.S. Treasury bonds by the U.S. Treasury Department, the market has become oversupplied with U.S. Treasury bonds, leading to a crisis in both interest rates and liquidity.

This has not only led to American investment bank fund managers starting to short and bet against U.S. Treasury bonds, but central banks of countries like China should also sell off U.S. Treasury bonds at this time. The data released in March should confirm my forecast.

Biden, Powell, and Yellen hold a joint meeting.In fact, U.S. Treasury Secretary Janet Yellen has already clearly recognized the problem of U.S. debt and has issued warnings on multiple occasions, even sending letters to the U.S. Congress to warn them. However, U.S. politicians, in order to secure votes and re-election, have chosen to continue issuing debt to stimulate the economy. This is the current approach of the Biden administration.

Therefore, although the Federal Reserve's monetary policy is said to serve the U.S. economy, in the final analysis, it is still serving U.S. politicians. Everything is a trick of the Federal Reserve and a "conspiracy" of U.S. politicians.