U.S. bonds crash, and the dollar also falls. Deutsche Bank warns: This time, even the Federal Reserve's QE won't save us!

The failure of U.S. bond auctions, coupled with a weakening dollar, indicates that foreign investors are "boycotting" U.S. assets. Deutsche Bank believes that only Congress, not the Federal Reserve, can resolve this issue.

According to the Wind Trading Desk, Deutsche Bank stated in its latest report that the core of this crisis lies in foreign investors' unwillingness to finance the U.S. fiscal and current account deficits at current price levels, and this issue can only be resolved by Congress through fiscal tightening, rather than through monetary policy intervention by the Federal Reserve.

In the face of this increasingly severe situation, Deutsche Bank explicitly warns to "prepare for more volatility."

At the same time, Deutsche Bank stated that the resilience of U.S. stocks will also be tested, and the behavior of Asian investors will become a key barometer, with investors needing to closely monitor the response of U.S. Treasuries and the dollar during Asian trading hours.

U.S. Stocks Are Also in Danger, Asian Investors Become Key Barometer

Deutsche Bank stated that in this environment, it is difficult for U.S. stocks to maintain resilience.

During the 2023-24 period, the rise in U.S. yields and stocks was a market reassessment of U.S. growth expectations. This is entirely reasonable. Today is very different. This is entirely an increase in the fiscal risk premium of U.S. assets, and it is hard to argue that this (negative driver of rising capital costs) can have a positive impact on risk assets.

Deutsche Bank analyst George Saravelos emphasized the importance of monitoring the behavior of Asian investors:

According to its external net balance framework, Asia is the primary provider of funding for the U.S. deficit, followed by Europe. Therefore, the performance of U.S. safety and exchange rates during non-U.S. trading hours becomes particularly critical.

If the dollar/yen accelerates downward during the Tokyo trading session, this will be a strong signal of capital flowing back to domestic markets from the U.S. Therefore, investors should closely monitor market reactions during Asian trading hours, as this may indicate further developments in the crisis.

Federal Reserve Intervention Is Useless, Only Congress Can Act: Fiscal Tightening or U.S. Debt Depreciation

Deutsche Bank stated that resolving this issue is not easy, and forms of financial repression, such as SLR reform and shortening the issuance period of U.S. Treasuries in the next refinancing announcement, have been frequently mentioned. To some extent, shortening the duration of the U.S. debt portfolio helps attract foreign buyers, but a lower duration also means higher debt rollover risk.

Deutsche Bank particularly emphasized that only Congress can solve this problem, and there are ultimately two "solutions" to this issue:

Extreme market dislocation may prompt the Federal Reserve to take intervention measures (QE) to maintain normal market operations, but this does not actually address the core of the problem and may even backfire by raising inflation expectations.

There are only two "solutions" to this problem: either the U.S. significantly modifies the reconciliation bill currently in Congress to implement stricter fiscal policies; or the non-dollar value of U.S. debt needs to decline significantly (such as through dollar depreciation) until it becomes cheap enough to attract foreign investors back.