"Dumping US Treasury Bonds to Protect Exchange Rates"? "Currency Defense Battle" Ignites the "Anchor of Pricing for Major Asset Classes"? JPMorgan Chase: Not Happening!

The yield on the ten-year U.S. Treasury bond has reached a fifteen-year high, signaling a possible "defense war" for non-U.S. currencies. However, according to JPMorgan Chase, the correlation between the U.S. dollar and U.S. bonds has weakened in recent years, and the surge in long-term Treasury yields is not significantly related to central bank interventions in exchange rates.

In the past week, some countries, including emerging markets, have intervened in their exchange rates due to excessive depreciation pressure on their currencies.

The Russian central bank announced an emergency interest rate hike of 350 basis points last Friday, the largest increase since February 2022. Since the beginning of 2023, the Russian ruble has depreciated by about 24% against the U.S. dollar, making it the third worst-performing emerging market currency this year.

According to Securities Times citing Indian media, the Reserve Bank of India secretly intervened in the exchange rate on Monday, with the USD/INR exchange rate breaking above 83 for the first time since October 2022. Nigeria, Argentina, and other countries have also prepared for or already participated in exchange rate interventions.

As the "anchor of global asset pricing," the yield on U.S. ten-year Treasury bonds continues to rise, putting pressure on non-U.S. currencies, and the South Korean won, Indian rupee, Thai baht, and Malaysian ringgit have hit multi-month lows.

The market generally believes that there are many factors behind the rise in the yield on ten-year U.S. Treasury bonds, such as expectations of a soft landing for the U.S. economy, comments from the Federal Reserve that interest rates will continue to be maintained at a high level, and a series of events such as increased issuance of U.S. Treasury debt by the U.S. Department of the Treasury.

JPMorgan Chase analysts, including Phoebe White, believe that although the above events can explain most of the decline in U.S. Treasury prices, U.S. Treasury bonds are currently oversold:

The convergence of these events may have acted as a catalyst, but we believe that the extent of the recent sell-off has now exceeded the fundamentals.

As we have pointed out in recent weeks, investors' positions in the duration space have also extended in the long direction, and the unwinding of long positions may have contributed to this trend.

JPMorgan Chase's logic is that considering the resilience of the U.S. economy, investors believe that U.S. Treasury prices are too high, and when investors obtain more expectations about a "non-landing" scenario, U.S. Treasury bonds will be sold off. However, due to the heavy losses suffered by some long positions during the reversal, U.S. Treasury bonds have been oversold.

As for the argument that the strength of the U.S. dollar has led other countries to sell U.S. Treasury bonds to support their own currencies, JPMorgan Chase is skeptical:

Although the U.S. dollar has always been a significant driving factor for foreign purchases of U.S. Treasury bonds, this relationship seems to have weakened in the past year.

In addition, even if there is indeed an official sell-off of US Treasury bonds, we are not sure if this will have a significant impact on long-term US bonds - foreign official holdings of US Treasury bonds are often concentrated at the front end of the yield curve, making them easier to liquidate during financial stress periods.

Despite the considerable volatility in discussions and yields in the market over the past few weeks, swap spreads remain relatively stable.

Overall, we do not believe that the sell-off of US Treasury bonds by foreign officials will become a significant driving factor affecting yields in the short term, nor will it have a significant negative impact on swap spreads.