On Tuesday (October 27), the main theme in the US Treasury market shifted from "when will the Federal Reserve tighten again" to "how risk sentiment and fiscal supply will be repriced." From August to early October, long-term yields experienced a significant rise, putting pressure on the bond market; in late October, the market rebounded, and yields fell from their early-month highs. However, it's important to distinguish between historical trends and recent quotes: this recent rebound was largely driven by safe-haven buying , while since the beginning of the year, the 10-year yield has still risen by about 84 basis points, and the 30-year yield by nearly 50 basis points, indicating significant downward pressure on prices this year.

The Fed's pause in expectations does not equate to a policy shift; inflation stickiness remains the core variable.

The market generally expects the Federal Reserve to keep interest rates unchanged this week, but disagreements remain regarding whether there will be another rate hike in December. The latest development is that comments from some Fed officials have cooled expectations for a short-term rate hike; however, rising consumer and producer prices in August and September, coupled with persistently high energy prices, make the sticky nature of inflation difficult to ignore. A fixed-income investment manager believes that the Fed does not have complete control over the market; the larger narrative revolves around the AI investment cycle and its risk sentiment. Recent capital outflows from some AI-related investments into bonds have created a safe-haven flow, which may outweigh minor changes in the Fed's expectations. Another senior investment analyst points out that inflation has accelerated again, so the current focus is more on observing the effects of recent rate hikes than a simple "pause," and further rate hikes are still possible this year. Therefore, what the market truly needs to price in is not whether rates will remain unchanged this week, but rather the correction of policy expectations based on the policy statement and official signals.

Fiscal supply and deficit pressures are suppressing long-term growth, making the curve shape more dependent on supply and demand.

Even with the Fed's pause, the long end may not be any easier. A recent client survey by a well-known investment bank shows that long positions have fallen to their lowest level since mid-August, reflecting a weakening willingness to bet on lower yields. Behind this is rising government financing needs: the budget deficit is about 6% of GDP, national debt is about $40 trillion, Treasury issuance has surged, and private investors need to absorb more debt. A chief market strategist at an asset management firm pointed out that net debt interest costs may consume more deficit resources, squeezing out other spending, and fiscal concerns will naturally push up yield curves. Another investment specialist believes that regardless of the election results, substantial fiscal constraints are unlikely, and more spending remains the path of least resistance. The midterm elections bring a layer of uncertainty, but the more important transmission channel is the expectation of fiscal spending after the election. For Treasury futures, the impact of fiscal supply and term premium on the long end and the shape of the yield curve may, in a phase, exceed the small changes expected by the Fed's policy.

The AI financing chain is changing, and widening credit spreads are supporting interest rate hedging.

One of the direct triggers for this round of bond market rebound was the tightening of financing for AI infrastructure. The market worried that this might slow down AI development, a key driver of the US economy. Funds withdrew from some AI-related transactions and flowed into bonds, exhibiting a safe-haven characteristic. However, the AI financing structure is changing: some large technology and AI companies are shifting towards equity financing, project financing, and private loans, while bond investors are more cautious about open-ended, multi-year capital expenditure financing. A credit strategy head at a well-known investment bank stated that bond investors prefer borrowing arrangements with clear endpoints, while AI capital expenditures are open commitments requiring further incentives for subsequent issuances, leading to a widening of credit spreads on existing bonds. Another fixed-income trading manager pointed out that investors need clarity on capital expenditures and issuance size; a lack of clarity results in a significant spread reaction. The high-interest-rate environment and the weak performance of two large bond transactions in September also contributed to a more cautious risk appetite. While the stock market's caution regarding AI has eased recently, the credit market is still demanding higher compensation; this divergence is important evidence for judging whether the safe-haven flow can continue.

Future Trend Outlook

Looking ahead, three key areas should be observed: First, the Fed's statement and official signals this week may lead to a revision of the pricing in a December rate hike, potentially causing a repricing of short-term yields and the yield curve. Second, if inflation and energy prices exceed expectations again, the downside potential for yields may be limited, while fiscal issuance and deficit pressures will continue to suppress long-term yields, making the yield curve more likely to be influenced by both supply and demand. Third, if changes in AI-related credit spreads and financing structures continue to unfold, safe-haven buying may provide temporary support to the bond market, but its sustainability depends on whether risk sentiment spreads from the stock market to the credit market. Overall, the bond market rebound has already reflected some safe-haven demand, but uncertainties surrounding inflation, fiscal supply, and the election have not yet been eliminated, and the market is more likely to exhibit a highly sensitive and volatile pattern to data and policy signals. The core message of this article is: the recent bond market rebound was triggered by concerns about AI financing and safe-haven flows, but inflation stickiness, fiscal supply, and election uncertainty limit its sustainability; the Fed's pause on expectations this week does not equate to a policy shift, and a December rate hike is still under discussion; long-term yields are suppressed by deficits and issuance, while widening AI credit spreads strengthen safe-haven demand and credit differentiation. Q: What was the direct trigger for this round of bond market rebound? A: Signs of tightness in AI infrastructure financing led to weakening risk sentiment, causing funds to shift towards safe-haven assets like government bonds. Q: Why isn't the Fed's pause in rate hikes necessarily beneficial for government bonds? A: Inflation and fiscal supply remain, and long-term yields are influenced by supply and demand; the Fed is not the only driver. Q: How does the fiscal deficit affect long-term yields? A: Increased issuance needs to be absorbed by private investors, leading to a rise in term premiums and pressure on long-term yields. Q: What does the change in AI company financing methods mean for the bond market? A: Open-ended capital expenditures and continued issuance widen credit spreads, prompting investors to demand higher compensation. Q: What is the main channel through which the midterm elections affect the bond market? A: Expectations and uncertainties surrounding the path of fiscal spending, rather than directly determining Fed policy.