When the United States targets Chinese assets for sniping, they themselves are in significant trouble.

The yield on U.S. Treasury bonds has suddenly increased, and the price has plummeted. The U.S. Treasury bonds after the rate cut have not only failed to trigger a buying frenzy in the market but have instead led to a wave of selling.

Faced with the rapidly changing financial market, what choices should the Federal Reserve make in the time to come?

The 3-year U.S. Treasury bonds are ignored.

According to a report on October 9th, last night the U.S. Department of the Treasury auctioned off $58 billion in 3-year U.S. Treasury bonds, setting a historical record for the auction size. However, the auction results were disappointing, with the U.S. financial market's trust in U.S. Treasury bonds declining and market demand being bleak.

The winning interest rate for this U.S. Treasury bond auction was set at 3.878%. This figure is not only the highest winning interest rate since the Federal Reserve implemented the rate cut policy but also a historical high.

In addition to globally renowned large hedge funds, the main participants in this bid also included various types of investment institutions such as U.S. pension funds, mutual funds, insurance companies, banks, and local government agencies, as well as numerous individual investors.

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However, it is worth noting that at this interest rate level, the allocation ratio obtained by major institutions was only 24%. This data undoubtedly reflects the intensity of market competition.In addition, investment institutions such as central banks from overseas, through brokers, bid and ultimately obtained an allocation ratio of 56.9%. Although this figure has set a new low record for 2024, it has experienced a sharp decline of 78.2% compared to last month.

In the end, 19% of the 3-year U.S. Treasury bonds were purchased in full by the Federal Reserve as the "buyer of last resort."

This market has caused considerable concern among Wall Street's U.S. Treasury bond traders because, as the U.S. fiscal deficit continues to expand, there will be trillions of dollars worth of long-term Treasury bonds with maturities over three years to be auctioned in the future. If demand continues to be weak, it may directly lead to a large number of U.S. Treasury bonds being unsold in auctions.

Ultimately, these unsold U.S. Treasury bonds will have to be taken on by the Federal Reserve.

Therefore, at this stage, the United States needs a more accommodative monetary policy and lower U.S. dollar interest rates to ensure the stable and upward movement of U.S. Treasury bond prices.

Can the Federal Reserve undertake the responsibility of maintaining the stability of U.S. dollar assets? A big question mark needs to be placed.

Worries about capital outflows due to interest rate cuts

At present, the primary concern facing the Federal Reserve is the international capital flow situation that may be triggered by its aggressive interest rate cuts and accommodative monetary policy. The most prominent issue is the large amount of hot money that is withdrawing from the United States and flowing into China's capital markets.

This trend is not accidental but an inevitable phenomenon in the complex financial system, so the Federal Reserve also has to address this issue with the highest priority.After the United States cut interest rates in September, the prices of Chinese assets suddenly soared, with A-shares rising by more than 20% in just a week. This excessive return made Wall Street capital sigh with envy, wishing to quicken their pace to immediately chase high Chinese assets.

Faced with this situation, the United States had to revise the already released economic data, trying to declare to the world that the U.S. economy remains strong.

However, this means that the Federal Reserve's room for interest rate cuts has been significantly reduced, leading to a sharp drop in U.S. Treasury bond prices and a weakened desire in the capital market to purchase U.S. Treasury bonds.

No one would be willing to buy an asset that depreciates as soon as it is acquired, and now the U.S. dollar and U.S. Treasury bonds are such assets with low returns and high risks.

Therefore, the Federal Reserve needs to maintain higher interest rates to attract global capital inflow into the United States.

The U.S. stock market, the U.S. dollar, and U.S. Treasury bonds - this impossible triangle is in front of the Federal Reserve, and they must give up one or even two. If they do not make a choice, all three will eventually be affected.

Now the Federal Reserve has no room for interest rate hikes:

Firstly, if U.S. dollar interest rates continue to rise, it will affect U.S. Treasury bond prices, leading to further large-scale sales of U.S. Treasury bonds and a decline in their prices.

Secondly, U.S. banks can no longer bear the burden of high interest rates and are at risk of bankruptcy.

Thirdly, the U.S. Treasury Department also cannot bear the high interest rate expenditure.The Federal Reserve's immediate priority is to quickly reduce interest rates and continue to dilute the dollar debt through quantitative easing.

It is precisely for this reason that Wall Street has always believed that, despite the fact that after 2021, the Federal Reserve has started quantitative tightening, the invisible quantitative easing of the U.S. Treasury has overwhelmed the Federal Reserve.

China will continue to reduce its holdings of U.S. Treasury bonds

China's holdings of U.S. Treasury bonds have significantly decreased from a historical high of up to $1.3 trillion to $805 billion. This means that over the past period, the total amount of this asset has decreased by nearly 40%.

According to the latest statistical data released by the State Administration of Foreign Exchange last year (the specific date was October 7, 2020), as of last month (i.e., the end of September 2020), our country's foreign exchange reserves reached an astonishing $3.3164 trillion, a value that has returned to the important milestone of $3.3 trillion for the first time since the end of December 2015.

From the perspective of exchange rates, non-dollar currencies are gradually appreciating, coupled with the fact that China has signed a currency swap agreement of 4.1 trillion with many countries in the first eight months of this year.

Therefore, the People's Bank of China will choose non-dollar currencies more in the direction of currency reserves.

Since September, the dollar has continued to depreciate, and correspondingly, the Japanese yen, British pound, and euro are all in an appreciation channel.

According to data disclosed by the United States, in July of this year, both China and Japan continued to sell U.S. Treasury bonds, and the holdings of U.S. Treasury bonds by the People's Bank of China also fell to a low since 2009.Japan has been reducing its holdings of U.S. Treasury bonds by $73.8 billion over four consecutive months, while China reduced its holdings by $3.2 billion in July.

So now, U.S. Treasury bonds are not only unsellable and face auction failures, but it is also difficult to find larger buyers for the existing stock at this stage.

Many of the U.S. Treasury bonds that have been sold are still being taken over by the Federal Reserve and American bankers, which only exacerbates the burden on the U.S. banking industry.

In addition to this, this situation will only force the Federal Reserve to lower interest rates, and then dilute the U.S. dollar debt through the method of printing money.