Guosen Securities has released a research report indicating that the current U.S. Treasury market is influenced by multiple factors, including resilient economic data, fiscal concerns, and geopolitical risks. The firm recommends a portfolio strategy described as "core short duration plus steepening satellite." The core holdings should focus on investment-grade bonds with maturities of 3 to 5 years to capture relatively stable coupon income and withstand short-term volatility. Simultaneously, exposure to U.S. Treasuries with maturities exceeding 10 years should be strictly controlled to avoid risks associated with rising long-term yields due to fiscal expansion.
Recent U.S. ISM data for January shows a simultaneous improvement in manufacturing and services sector sentiment, indicating a clear enhancement in economic momentum. The Manufacturing PMI surged significantly from 47.9 to 52.6, well above expectations, returning to expansion territory and hitting a multi-year high. This was primarily driven by a strong rebound in new orders and production, suggesting accelerated inventory replenishment by businesses and a recovery in demand. However, the employment index remained below the 50-point threshold that separates expansion from contraction, indicating a slow recovery in manufacturing hiring. Coupled with a rise in the prices paid index, this reflects renewed cost pressures.
In the services sector, the PMI held steady at a cyclical high of 53.8, demonstrating a stable expansion trend with solid business activity. Nevertheless, the growth rate of new orders slowed, and employment growth nearly stalled around the expansion-contraction line, revealing a disconnect between demand recovery and hiring. Furthermore, rising price indices suggest increasing inflationary pressures within the services sector. Overall, while the U.S. economy shows a clear improvement in sentiment at the start of the year, structural issues remain prominent, characterized by weak employment recovery and mounting cost pressures.
Market risk aversion has increased, but demand for U.S. Treasuries has not been strong. During last week's sell-off, driven by concerns over potential liquidity shocks from a change in Federal Reserve leadership and fears about AI displacing software-related jobs, the rise in U.S. Treasury prices was notably modest. Meanwhile, the yield curve steepened significantly, with the spread between 10-year and 2-year yields approaching multi-year highs. This indicates that despite heightened risk aversion, capital has not flowed heavily into long-term U.S. bonds. This unusual phenomenon is attributed primarily to deep-seated market worries about U.S. fiscal policy. Massive fiscal deficits have fueled investor expectations of a surge in future government bond supply. Concerns about potential oversupply have outweighed the typical safe-haven demand for long-term bonds during periods of panic, leading to investor reluctance to hold long-dated debt.
The U.S. Dollar Index (DXY) has seen a short-term rebound but remains in a long-term downtrend. This week, the index was largely flat, having recovered approximately 1.6% from last week's low. However, it has still fallen nearly 10% over the past 12 months, indicating that its overall weak trajectory remains unchanged. In the corporate bond market, credit spreads—which measure risk—have widened from recent lows, signaling more cautious risk pricing. However, compared to their highs over the past year, spreads remain at healthier levels, suggesting that while market sentiment has cooled, it is far from panic.
Market focus is shifting towards key economic data releases this week, namely the Consumer Price Index (CPI) and non-farm payrolls reports for January, which were delayed. The non-farm payrolls report is expected to show an addition of 60,000 jobs, compared to a previous figure of 50,000, with the unemployment rate anticipated to hold steady at 4.4%. However, last week's ADP employment report showed only 22,000 jobs added, significantly below expectations, indicating that the labor market remains in a state of stagnation with low hiring and low layoff rates. Additionally, this non-farm payrolls report will include annual benchmark revisions to historical employment data. If past data is revised downward, it could further influence market expectations regarding Federal Reserve policy.
The CPI for January is forecast to rise 2.7% year-over-year, matching the December rate. Although the Federal Reserve has recently downplayed inflation concerns, sticky services sector inflation and policy uncertainty continue to keep markets alert. Mary Daly, President of the Federal Reserve Bank of San Francisco, has indicated that further interest rate cuts—perhaps one or two—might be necessary to address labor market weakness, particularly focusing on the erosion of wages by high prices and the reduction in job opportunities.