This time, if the U.S. enters a recession, U.S. Treasury yields may not decline

On March 27, Deutsche Bank analysts Matthew Raski, Steven Zeng, and others pointed out in their latest research report that even if the U.S. economy may enter a recession in the future, the 10-year U.S. Treasury yield may not decline significantly as it has in traditional cycles.

The report identifies two core factors supporting this judgment: first, the potential "negative supply shock" may raise inflation expectations, limiting the Federal Reserve's room for easing or raising term premiums.

Second, the weakening of the "American exceptionalism" may reduce foreign investors' demand for U.S. Treasury bonds, pushing up term premiums and the non-growth-related portion of the neutral interest rate.

Supply shocks trigger unconventional recessions, the collapse of "American exceptionalism"

Specifically, the report states that if the slowdown in the U.S. economy is driven by supply-side shocks (such as energy crises, supply chain disruptions, etc.), the resulting rise in inflation expectations may limit the Federal Reserve's ability to implement monetary easing policies, and may even lead to an increase in term premiums themselves, thereby supporting long-term yields.

Another potential factor is the weakening of "American exceptionalism."

The report indicates that recent market attention has increasingly focused on how certain U.S. policies may negatively impact foreign investors' willingness to hold U.S. Treasury bonds. If foreign demand weakens, this will naturally increase the term premium of U.S. Treasury bonds, which has indeed shown an upward trend recently.

It is noteworthy that the weakening of "American exceptionalism" not only raises term premiums but may also exert upward pressure on the neutral interest rate (r _).

The report explains that both the neutral interest rate and term premiums reflect the balance between the supply of savings and the demand for safe dollar assets. Therefore, a decrease in demand not only affects risk compensation (term premiums) but may also impact the benchmark risk-free interest rate level.

The report shows that over the past few decades, term premiums have generally trended downward, partly due to reduced inflation risks, but also driven by factors such as global savings excess, demographic changes, and increased demand due to risk aversion following the financial crisis. During this period, "other determining factors" have also declined and exhibited reasonable correlation with term premiums at lower frequencies.