Soaring U.S. Interest Rates... Signs Emerging for a Possible Decline [Weekend Money]

Focus on Midterm Elections, Stablecoins, and Treasury Issuance Strategy

Recent news about interest rates has not been favorable for U.S. Treasury bond investors. While some hope that rates have risen enough to trigger a rebound, the trends in oil prices and inflation remain concerning. Is there any factor that could halt the ongoing upward trajectory of interest rates? Analysts in the securities industry say attention should be paid to the period after the U.S. midterm elections, now just a month away.

Kim Ilhyeok, a researcher at KB Securities, outlined three conditions that could slow the rise in interest rates or return the yield on the 10-year U.S. Treasury bond to the 4% range. The recent surge in interest rates has been driven by concerns about inflation due to rising oil prices and the influx of Treasury and corporate bond supply. If inflationary pressures ease and more investors emerge to buy bonds, the market atmosphere could change.

The first variable is the upcoming midterm election scheduled for the 3rd of next month. If the Democratic Party secures a majority in both the House and Senate, it could put the brakes on the defense spending increases pursued by the Trump administration. If increased war spending becomes more difficult, the likelihood of prolonged military operations in the Middle East may also decrease. This could alleviate concerns about both oil prices and U.S. fiscal stability.

Researcher Kim commented, "While the Republican Party could push through a defense spending increase before the new Congress is formed, considering that more defense spending could prolong military operations and the U.S.-Iran war is a negative factor for Republicans in the midterm elections, the likelihood is low," adding, "If defense spending increases are curbed, it would help reduce both fiscal anxiety and geopolitical risks in the Middle East."

The second factor is stablecoins. Issuers of coins pegged to the U.S. dollar and other currencies use U.S. short-term Treasury bonds as reserve assets. If coin usage increases, demand for Treasury bonds could grow accordingly. Researcher Kim highlighted the possibility of progress on the 'Clarity Act,' legislation to establish clearer rules for the virtual asset market, through political negotiations after the election. The reasoning is that a reduction in regulatory uncertainty and a further spread of stablecoins would benefit the short-term Treasury market.

The third factor is the way the U.S. government borrows money. If the government issues a larger volume of long-term Treasury bonds, the market may demand higher interest rates to absorb this supply. In contrast, increasing the issuance of short-term bonds and limiting the supply of long-term bonds could help reduce the upward pressure on long-term rates.

Researcher Kim analyzed, "There is a high possibility that the Federal Reserve will increase the proportion of short-term securities in its holdings and that the Treasury Department will adjust the composition of its issuances accordingly. While the term premium on long-term Treasuries may rise, if both the departmental borrowing plan (QRA) released the day after the midterm elections in November and the plan scheduled for February next year restrict increases in long-term issuance, an implicit coordination between the Treasury and the Federal Reserve could help stabilize interest rates."

This content was produced with the assistance of AI translation services.