UST 10 yr: How high is high enough AND More....

1. Given the elevated yield and looming anticipation of further rate increases in the upcoming months, the cost of financing treasury borrowing escalates. This places the treasury in a precarious situation. The landscape for equity valuations appears bleak, underscored by banks registering significant losses and compressing net interest margins.

2. As growth decelerates, corporate revenue streams are expected to face mounting challenges. Concurrently, transitioning to higher refinancing rates will amplify their interest obligations. On the consumer front, confidence has diminished, dropping to 106.1 from 117, signaling growing apprehensions surrounding job security.

3. The differential between real and nominal rates, known as the breakeven inflation spread, remains relatively stable. This stability indicates that while investors aren't particularly anxious about inflationary threats, they are seeking a greater real term premium for holding extended-maturity government bonds.

4. Moreover, as the Bank of Japan moderates its JGB purchasing activity, domestic investors gain enhanced flexibility to diversify away from U.S. Treasuries. This diversion suppresses the demand for U.S. Treasuries, subsequently elevating yields. This pronounced uptick in long-term yields could persuade the Federal Reserve to refrain from further rate hikes, given that these surging yields could dampen business operations, potentially aiding in reaching the inflationary objectives.

5. The intricacies of China's financial sectors remain shrouded, with non-banking financial institutions emerging as potential vulnerability points. Numerous domestic investors have channeled their capital into entities lacking clear governmental assurances, often relying on property development ventures for returns. With the real estate sector under duress, a multitude of trust mechanisms may verge on instability, exerting pressure on both the financial landscape and individual investors. In a milieu where stimulating domestic consumption is already intricate, reneging on commitments to investors could wreak considerable havoc.

6. Given the notable 20bp surge in 10-year yields over a mere 3-day span, how should we interpret the yield curve? My assessment is that the uptick in yields isn't primarily fueled by inflation worries. Rather, it stems from diminished recession anticipations, which, paradoxically, might pave the way for an augmented supply of government bonds down the line.

7. There are captivating trends regarding the savings and deposit patterns across both small and large banking institutions. These patterns influence their strategies in navigating competitive investment channels, such as money market funds. Given that savers currently reap a 3% return on bank deposits versus a 5% yield on MMFs, banks find themselves in a quandary. They're compelled to either match or surpass these rates, which can subsequently translate into stricter lending conditions or diminished profit margins. This dynamic is catalyzing the ascent of non-bank lending entities. Concurrently, regulatory shifts are poised to subject a broader asset base to rigorous liquidity oversight.

8. Another key feature: seniority in the capital structure. The CDLI index reflects the shift, over time, to private credit becoming typically more senior and less subordinated, that is, moving up the pecking order for getting paid back.

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