Auctions of Japanese and US bonds were cold, gold and Bitcoin hit new highs

Global markets have always been rippled. Previously, Moody's downgrade of the US credit rating only led to a one-day trip of the US "stock, bond and foreign exchange triple kill". Many executives of large Wall Street institutions began to warn investors of the risk of being too complacent in US dollar assets and believed that something "deeper" was happening in the global financial system.

As soon as the voice fell, the auctions of Japanese and US bonds, which are regarded as traditional safe-haven assets, were cold one after another, and the latter caused the United States to suffer another "stock, bond and foreign exchange triple kill" on Wednesday. At the same time, the prices of gold and Bitcoin rose to record highs. In addition, as more investors choose to "sell the United States" transactions, analysts believe that emerging markets are expected to start a bull market.

Logic behind the decline in the attractiveness of US and Japanese bonds

On Wednesday, the United States once again suffered a triple blow in stocks, bonds and currencies: the three major US stock indexes suffered the worst sell-off since April, the long-term US bond yields rose by double-digit basis points in a single day, and the US dollar index fell by nearly 50 points in a single day, missing the key point of 100. Among them, US bonds once again became the "eye of the storm" of the big drop. The highest winning bid rate of 20-year US bonds auctioned that day reached 5.047%, exceeding 5% for the second time in history, and recorded the largest tail spread in nearly 6 months, and the bid multiple also dropped from the average level of 2.57 in the past six months to 2.46. Such bleak auction data occurred in the first long-term bond auction after Moody's downgraded the US credit rating. The demand for long-term US bonds, which should have been a safe-haven asset, was cold, which once again triggered investor panic and led to a simultaneous plunge in US stocks and the US dollar.

Concerns about the high level of US debt and the "Beautiful Bill" that US President Trump is trying to pass, which may further expand the US deficit and further deteriorate the fiscal situation, are considered to be the root causes of the cold auction and the new wave of "selling US dollar assets". According to the forecast of non-partisan analysis agencies, if the "Beautiful Bill" is passed, it is expected to increase US debt by another 3 to 5 trillion US dollars.

Sam Stovall, chief investment strategist at CFRA Research, said: "The key question is what the tax bill will eventually look like from a fiscal perspective and whether it can eliminate recent fiscal concerns. At present, the tax bill is more likely to pass, and the final plan will continue to increase the overall debt level."

Eugene Epstein, head of North American trading and structured products at Moneycorp, told the First Financial reporter: "Even before, the US debt/GDP has accelerated, spending has exceeded growth, and investors have generally been adjusting their allocation to US bonds and the US dollar. The fiscally difficult United States undoubtedly means that investors will demand higher returns and term premiums before they are willing to hold US bonds." The 30-year US bond yield broke through 5% for the second time this week on Wednesday, and the 10-year US bond yield rose to 4.61%, the highest level since February.

He added that the surge in US bond yields means that the borrowing costs of companies and consumers have risen, which is understandable for triggering the sell-off of other US dollar assets. Moreover, unlike the tariff factor that caused the triple kill of stocks, bonds and currencies before, the tax bill needs to be negotiated through different levels of government and get the consensus of unruly politicians, while the tariff can be unilaterally suspended or cancelled by Trump, and the "Trump put option" will not help in this kind of sell-off.

Many analysts also emphasized that the impact of Moody's downgrade is also different from that in history. When the United States suffered its first downgrade by S&P Global in 2011, it not only did not cause turmoil in US debt, but because global investors were very convinced of the safe-haven status of US debt at that time, US debt yields and term premiums fell sharply. But at that time, although the US government debt/GDP ratio was 94%, the federal funds rate was only 0.25%, and the inflation rate was 3% and faced downward pressure. Today, Moody's data shows that the US public debt accounts for about 100% of GDP and is expected to rise further to 134% in the next decade. At the same time, the official interest rate is over 4%. Although the inflation rate has fallen back to 2.3%, as tariffs trigger price increases, consumers' short-term and long-term inflation expectations have reached their highest levels in decades.

Emanuel Moench, professor at Frankfurt School of Finance and Management and co-creator of the New York Fed's "ACM" term premium model, said that given the fiscal challenges facing the United States, the term premium has risen significantly recently and may continue to rise in the future. Some investors worry that this may further lead to a self-fulfilling debt crisis, that is, the high debt/GDP ratio pushes up interest rates, increases the government's financing burden, narrows the space for the US government to resolve debt through growth, and further pushes up the term premium. With the current high fiscal uncertainty and low policy credibility, US bonds are at a vulnerable moment.

Changes in US bonds, as the anchor of global asset pricing, are bound to trigger a chain reaction in the global bond market. On Wednesday, the yield on 30-year Japanese bonds also climbed to 3.16%, a record high; the yield on 10-year Japanese bonds climbed to 1.52%, a nearly two-month high. The 20-year Japanese government bonds auctioned earlier recorded the worst since 2012, with the bid-to-cover ratio falling to 2.5 times and the tail spread rising to the highest level since 1987.

As Japanese bond yields continue to rise, the interest rate differential between the United States and Japan will further narrow, causing the yen to further appreciate against the dollar. Japan's spillover effect on global liquidity is mainly achieved through yen carry trades, and the basis of this carry trade is that the short-term interest rate differential between the United States and Japan is large enough to motivate global investors to borrow yen and invest in global markets. Sam Stovall said that based on this, the continued rise in Japanese bond yields will affect yen carry trades, and yen carry funds have historically flowed mainly to the European and American markets. Once the yen carry trade is hit, global assets including US stocks and US bonds will be hit.

Gold and Bitcoin hit new highs

As US dollar assets fall into a credit crisis, the safe-haven asset attributes of gold are becoming more and more prominent. On the 22nd, spot gold continued to rise, breaking through $3,340/ounce, continuing to hit a new high since May 9. Historically, gold's performance in stagflation cycles has also been remarkable. At present, the US economy is heading towards a stagflation environment of "high debt + low growth + inflation stickiness". During the stagflation period of the 1970s, the annualized return rate of gold reached 30%. Looking deeper, more and more market participants and investors believe that in the context of the global monetary system being hit again, although it is difficult to return to the gold standard, gold has once again partially served as an alternative anchor for sovereign credit currencies.

Wall Street institutions therefore generally expect that the price of gold will rise above the previous high of about $3,500 per ounce, setting a new record. Goldman Sachs expects the price of gold to rise to $3,700 per ounce by the end of 2025 and further to $4,000 per ounce by mid-2026. UBS predicts that the price of gold will reach $3,500 per ounce by the end of this year, and is expected to reach $3,800 per ounce in a risk-averse scenario.

Not only gold, but also cryptocurrencies, which are increasingly considered to be potential alternative investment products, have benefited from the "selling of US dollar assets" transaction. Among them, Bitcoin, the largest cryptocurrency, rose to $109,500 on Wednesday (21st), exceeding the previous high in January this year, and quietly set a new record again.

After struggling for weeks with tariff-related uncertainty, Bitcoin has been climbing steadily since May and is up 15% so far this month. According to SoSoValue data, exchange-traded funds (ETFs) that track Bitcoin prices saw inflows of more than $40 billion last week. Antoni Trenchev, co-founder of cryptocurrency exchange Nexo, said: "Bitcoin's record high is caused by a series of favorable factors in the macro environment, including weak US inflation data, easing trade tensions, and Moody's downgrade of US sovereign debt ratings, which has made alternative value storage assets such as Bitcoin one of the focus of investors' attention." In addition, investors expect that factors including US regulatory dynamics and more US-listed companies including Bitcoin in their portfolios are also continuing to push up Bitcoin prices. On Monday, the US Senate passed a procedural vote on the "Genesis Stablecoin Uniform Standards Safeguard Act" (GENIUS), which is expected to be voted on by the entire Senate in the coming days. As the regulatory framework for US dollar stablecoins is established, a large number of financial and technology companies are expected to get involved in this field. Trump also said earlier that he hopes Congress will submit the bill to him for signature before the August recess. Meanwhile, according to data from Bitcoin Treasuries, the number of bitcoins held by US listed companies has increased by 31% since the beginning of the year to about $349 billion, accounting for 15% of the total supply of bitcoins. Bitcoin investment company Strategy has purchased more than $50 billion worth of bitcoins. Cantor Fitzgerald, a financial company founded by US Commerce Secretary Lutnick, is also working with SoftBank and Tethers, the issuer of USDT, to establish Twenty One Capital, which emulates Strategy's strategy.

Emerging markets may usher in a bull market

Michael Hartnett, a well-known strategist at Bank of America, recently called emerging markets the "next bull market" in the global market because "the dollar is weak, US bond yields are high, and China's economic recovery... In such an environment, there is no better investment than emerging market stocks." JPMorgan Chase also upgraded its emerging market stock rating from neutral to overweight on Monday, citing the easing of trade tensions and attractive valuations of emerging market stocks.

The MSCI Emerging Markets Index, which tracks large and medium-sized stocks in 24 emerging market countries, has risen 8.55% so far this year. During the same period, the S&P 500 rose only 1%. This trend difference was even more significant after the so-called reciprocal tariffs were announced on April 2. After the policy was announced, most global benchmark stock indices fell across the board in the following days, but from April 9 to 21, the S&P 500 fell more than 5%, while the MSCI Emerging Markets Index rose 7%.

Malcolm Dorson, head of investment at Global X ETF, told China Business News that recent events have strengthened global investors' demand for diversified regional risk exposure. After lagging behind the S&P 500 over the past decade, emerging market stocks have a unique advantage in the next cycle. This perfect storm stems from the possibility of continued weakness in the US dollar, extremely low current positions of investors in emerging market stocks, and huge growth potential at a valuation discount. "According to the agency's statistics, many US investors hold only 3% to 5% of emerging market stocks, while their holdings in the MSCI Global Index are 10.5%. JPMorgan Chase's statistics also show that compared with developed market stocks, the overall forward yield of emerging market stocks is 12 times, and the discount is higher than the typical level of stock markets in other regions of the world.

Ola El Shawarby, portfolio manager at asset management company VanEck, said: "We have seen emerging market rallies eventually lose momentum, usually because they are driven by short-term macro catalysts. But the current cycle is different because emerging market asset valuations are significantly discounted, investor holdings are at historical lows, and emerging markets themselves have undergone some lasting structural developments. "