Guotai Junan Securities: Current U.S. Treasury investment needs to focus on structural selection, with a preference for medium to short duration and cautious allocation to long-term bonds

According to the Zhitong Finance APP, Guosen Securities released a research report stating that the resilience of U.S. inflation and employment data, along with the uncertainty of trade policies, has delayed expectations for the Federal Reserve to cut interest rates until September or even later. Meanwhile, long-term yields on U.S. Treasury bonds continue to be pressured due to fiscal deficits and supply-demand imbalances, with risks rising for 30-year Treasury bonds. Investors are advised to focus on medium- to short-term U.S. Treasury bond allocations, preferably selecting 2-5 year maturities to balance returns and volatility; they should cautiously allocate to long-duration bonds and consider a moderate allocation to TIPS or floating-rate bonds to hedge against inflation and interest rate risks. Additionally, global asset allocation can be used to moderately introduce other sovereign bonds to enhance portfolio resilience.

Guosen Securities' views are as follows:

U.S. non-farm employment slowed in May, with the unemployment rate effectively rising, showing initial signs of weakness in the labor market.

In May, non-farm payrolls increased by 139,000, slightly above expectations but the lowest in three months, with the employment data for the previous two months revised down by a total of 95,000, weakening the overall performance. The unemployment rate remained flat at 4.2%, but has actually risen to 4.244%, the highest since 2021, indicating initial signs of weakness in the labor market. Wages rose by 0.4% month-on-month and reached 3.9% year-on-year, both exceeding market expectations of 0.2% and 3.7%, showing strong performance, but mainly due to a contraction in labor supply rather than strong demand, with over 600,000 full-time positions lost and the labor participation rate dropping to 62.4%, a three-month low. Manufacturing employment decreased by 8,000, and federal government layoffs totaled 22,000, reflecting the impact of policy uncertainty and fiscal contraction. Although employment in healthcare and hospitality sectors continued to grow, it was insufficient to reverse the overall weakness.

The Federal Reserve's Beige Book indicates a slight slowdown in the U.S. economy, with businesses planning to pass on costs and reduce hiring due to tariffs and uncertainty, leading to a more pessimistic outlook.

The latest Beige Book from the Federal Reserve noted that as of May 23, U.S. economic activity had slightly declined in recent weeks, with tariffs and high uncertainty suppressing confidence among businesses and households. Reports from various regions indicated weak labor demand and delayed hiring, with moderate wage increases. Most regions experienced "moderate" price increases, and businesses generally expect costs and prices to continue rising sharply, planning to pass on tariff-related costs to consumers in the next three months. Many businesses have thus raised prices, reduced hiring, closed production lines, or laid off workers, with a decrease in international tourists and weakening retail and tourism activities. Overall, the economic outlook is "slightly pessimistic and uncertain."

The market ignores Trump's remarks, maintaining expectations for two interest rate cuts within the year, with the first expected in September.

Despite Trump's recent comments that the Federal Reserve's "big delay" is a disaster, and that Europe has cut rates 10 times, urging the Fed to cut rates by 1 percentage point as soon as possible, market expectations have largely ignored Trump's calls for a rate cut. The market continues to lower expectations for the Fed's rate cuts in June and July due to the relatively decent non-farm data in May. The CME "FedWatch" tool shows a 99.9% probability of maintaining rates in June, with a 0.1% probability of a 25 basis point cut, and an 85.5% probability of maintaining rates in July, with a cumulative probability of only 14.5% for a 25 basis point cut. It is expected that monetary policy will remain on hold in the short term, awaiting further clarity on inflation and trade developments U.S. Treasury yields rise across the board, with a slight narrowing of the yield curve.

The U.S. Treasury yield curve has shown a bear flattening trend over the past two weeks, with yields for 1-year/2-year/3-year/5-year/10-year/20-year/30-year U.S. Treasuries changing by -1/4/6/5/0/-4/-7 basis points, respectively. The 10-year and 2-year yields recorded 4.51% and 4.04%, respectively, with the 10Y-2Y spread narrowing slightly to 47 basis points.

Risk Warning: Uncertainty in the U.S. economy and monetary and fiscal policies, issuer credit risk, and uncertainty in international political situations