Market risk appetite declines as U.S. Treasury bonds breach important "psychological barrier"

The U.S. Treasury market has been turbulent this week.

According to Zhitong Finance APP, the 4% level, long regarded by the market as a "psychological defense line," has finally been breached, with the 10-year U.S. Treasury yield closing at 3.976% on Thursday, the lowest level since 2025. This marks the first time this year that the yield has closed below 4% since it briefly fell to 3.992% after Trump announced tariff increases on April 4.

The 10-year U.S. Treasury yield is an important barometer for mortgage rates and economic confidence, and its decline is often seen as a signal of economic slowdown and a flight to safety. Since bond prices and yields have an inverse relationship, a drop in yields also means an increase in the paper gains for bondholders.

The market had remained relatively calm due to a lack of economic data caused by the government shutdown lasting 16 days. However, tensions between China and the U.S. resurfaced last week, coupled with rising risks of bad loans in banks this week, prompting investors to turn to long-term government bonds for safety.

The latest regional data was the final blow. Data from the New York Fed on Thursday showed a significant contraction in service sector activity in parts of New York, New Jersey, and Connecticut in October; the Philadelphia Fed manufacturing index also fell to a six-month low. The weak data further reinforced market concerns about an economic slowdown.

Recently, from the surge in gold prices to warnings from experts at the International Monetary Fund (IMF) annual meeting about a slowdown in the U.S. economy, all indicate that market risk appetite is declining. Federal Reserve Chairman Jerome Powell stated on Tuesday that the central bank still plans to continue cutting interest rates to "provide more support" for the economy, further solidifying expectations for easing.

At the same time, falling energy prices have also intensified the downward trend in inflation. Over the past month, the average gasoline price in the U.S. has dropped by about 4%, becoming one of the key factors driving down yields.

The macro research firm Bear Traps noted in a client report: "Although the government shutdown has delayed the release of September CPI data, inflation swaps have clearly followed oil prices down, which also explains the continuous decline in yields since the end of August."

Market participants are currently focused on the September Consumer Price Index (CPI) data scheduled to be released by the U.S. Bureau of Labor Statistics on October 24. If inflation continues to weaken, the trend of yields falling below 4% may be solidified; conversely, if the data is stronger than expected, it could trigger a rebound in yields.

At present, Wall Street generally believes that the fundamental reason for the decline in U.S. Treasury yields is the growing consensus on economic slowdown and policy easing. As Garvey stated: "These data have limited impact, but they do point to weakness at the macro level."