Have US Treasury bonds bottomed out? Goldman Sachs trading desk head: Long-term bonds "remain completely unwanted."

The US Treasury market is facing multiple pressures. Long-term Treasury yields continue to rise, buying interest has been slow to materialize, and the divergence between bonds and stocks is attracting increasing attention.

Rich Privorotsky, head of trading at Goldman Sachs, bluntly stated that long-term US Treasuries are "still completely ignored." Although the latest PCE data was lower than expected, slightly reducing the likelihood of an October rate hike, this has had almost no real impact on the trend of long-term Treasury yields—the expectation of a rate hike in short-term interest rates has been largely priced in, and the real pressure is still concentrated at the far end of the yield curve.

At the same time, volatility expectations for long-term government bonds have become significantly decoupled from anxieties in the short-term interest rate market. Privorotsky concluded, "This situation urgently needs to be calmed down."

The rapid rise in yields is also triggering several warning signals based on historical data. Florian Roger of BNP Paribas CIB stated that 5.5% is considered the critical point where the yield on the 10-year US Treasury bond will exert substantial pressure on the stock market. "We are very close, at which point stock valuations will begin to appear overvalued."

Bloomberg macro strategist Simon White cautioned that investors should not be misled by apparent undervaluation—given the historical trajectory of US Treasuries, yields may not have bottomed out yet.

Long-term US Treasuries lack buying interest, and a bond market rebound has yet to occur.

The 10-year US Treasury yield has risen to 5.34%, but this level has not yet triggered significant buying. Although US Treasury valuations are attractive from several perspectives, a wait-and-see attitude still dominates the market.

Analysis by Bloomberg macro strategist Simon White shows that, when comparing the 10-year US Treasury yield with the average of US nominal GDP and the 10-year German bond yield, after excluding the two special periods of the pandemic and the global financial crisis, the historical trends of the two are highly consistent, while the current US Treasury yield is significantly higher than this average.

Meanwhile, the 10-year yield is more than 60 basis points higher than the fair value model constructed by the pace of interest rate hikes by global central banks, the yield curve, oil prices and policy rates, but neither foreign nor domestic buying has made significant inroads.

The relative value of stocks and bonds sends a similar signal. The equity risk premium, measured by the spread between the earnings per share over the past 12 months and the 10-year Treasury yield, has fallen to its lowest level in more than 20 years, meaning that the attractiveness of stocks relative to bonds is at a historical low. Even when calculated based on forward earnings, this indicator is close to its historical low for 2025.

White points out that adjusted yields, which exclude term premiums, provide a fairer comparison. Under this caliber, US Treasuries still have some appeal, but their advantage has narrowed.

Historical mean reversion suggests that overselling has not yet reached its target.

While the aforementioned valuation metrics point to a relative undervaluation of US Treasuries, White's simpler analytical framework—historical mean reversion of the annual total return of US Treasuries—offers a more cautious signal.

The framework shows that annual returns on US Treasuries tend to fluctuate around the mean over the long term, often overshooting below the mean during downward phases. Currently, annual returns on US Treasuries have fallen back to near the trend mean, but historical data suggests that this level does not necessarily indicate a bottom has been reached. Based on over 50 years of historical data, in approximately three-quarters of cases where returns have declined for six consecutive months and fallen back to near the mean, returns tend to fall further three months later.

The trend in real yields also supports this assessment. The current rise in nominal yields has been primarily driven by real yields, while the inflation breakeven rate has been relatively moderate. White's 10-year real yield leading indicator, which considers factors such as excess liquidity, the pace of global central bank interest rate hikes, and the Federal Reserve's policy rate, shows that real yields still have room to rise further. This indicator leads real yields by approximately three to four months.

Fiscal pressure and liquidity risks cannot be ignored.

Potential buyers also need to face the severe fiscal situation in the United States before they can enter the market.

Among major emerging markets and developed economies, the United States has one of the highest fiscal deficits as a percentage of GDP globally, following only Brazil, Poland, Hungary, and Colombia. Even excluding interest payments, the US primary fiscal deficit remains the highest in the world, tied with the United Kingdom, highlighting the significant fiscal pressure it faces.

As yields continue to rise, market risks may become self-reinforcing. Rising yields will increase volatility, which in turn will affect margin requirements and limits on government bond exposure. Historically, increased volatility has often been accompanied by a deterioration in liquidity in the government bond market.

White also pointed out that when the 10-year yield remains above 5.25% to 5.50%, the correlation between US Treasuries and stocks has historically tended to turn into a sustained positive correlation, thereby further weakening the demand for US Treasuries as a portfolio hedging tool.

Expectations of government intervention are rising, but this is unlikely to be a reason to buy.

Under multiple pressures, market expectations for policy intervention are rising. It is understood that the U.S. Treasury Department hired Jefferies' chief market strategist, David Zervos, as an advisor this week, a move that may not be a coincidence. In an interview, Zervos stated that the Treasury Department is regaining control over debt maturity management and emphasized that "it is necessary to closely monitor how this process progresses."

However, White cautions that while expectations of government intervention increase short-selling risk, they are insufficient to constitute a strong reason to buy. Once the market develops expectations of government intervention, it may find itself in a dilemma where it is difficult to short sell, yet also difficult to confidently go long. Investors should remain vigilant.

The core contradiction in the current US Treasury market is that while valuations have improved, multiple constraints from technical, fiscal, and liquidity perspectives have not been eliminated, and whether yields have approached a true low point remains to be confirmed.

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