11th January 2025

1. US Yields Hit 14-Month High

• The 30-year US Treasury yield rose to 4.86%, the highest since November 2023, driven by weak demand at auctions and Trump’s tariff speculation, which is raising inflation concerns.

• Trump denied reports of a narrower tariff plan, stoking fears of protectionism that could push rates higher. The 10-year yield also hit 4.64%, its highest since May, with Morgan Stanley warning that rates are key to stock market performance in early 2025.

• The Fed is expected to slow rate cuts amid inflation concerns, while the US debt ceiling battle looms, adding more pressure on bond markets. Analysts believe yields may continue rising if inflation persists and the government pursues aggressive spending.

2. US Corporate Bankruptcies Hit 14-Year High

• US corporate bankruptcies hit a 14-year high in 2024 due to high interest rates, inflation, and weakened consumer spending.

• At least 686 companies filed for bankruptcy, the most since 2010.

• Party City, Tupperware, Red Lobster, and Avon were among major failures as discretionary spending declined.

• Companies also sought out-of-court debt restructuring to avoid bankruptcy, though many still collapsed.

• The Federal Reserve’s gradual rate cuts have eased pressure, but recovery rates for lenders remain low.

• Experts see the rise in bankruptcies as concerning but not yet a major economic threat.

3. Is China's Deflation a Stagnation Warning?

• Investors fear China is heading toward a long-term economic stagnation similar to Japan’s “lost decades”, marked by deflation, low bond yields, and weak consumer confidence. Despite government stimulus measures, 10-year Chinese bond yields have fallen to all-time lows, signalling pessimism about the world’s second-largest economy.
• China faces similar issues as Japan did in the 1990s: a real estate crash, aging population, high debt, and low private investment. Analysts warn that inaction by policymakers could deepen the deflationary spiral, making recovery harder. The bond market signals a “balance sheet recession”, where businesses and households focus on debt reduction, further weakening the economy.
• While some experts believe China’s stronger state control could help avoid Japan’s fate, the clock is ticking. Analysts urge Beijing to boost consumer spending directly to revive confidence and avoid a prolonged downturn. New industries like electric vehicles could offer a path forward, but policy adjustments are urgently needed.

4. The US Mortgage Market's "Hidden Force"

• Mortgage rates are nearing 7% due to rising Treasury yields, inflation fears, and fewer expected Fed rate cuts.?
• However, a “hidden force” — the wide gap between mortgage rates and Treasury yields — could help lower rates even if economic conditions don’t change.?
• This gap, driven by market volatility and reduced demand for mortgage bonds, has been unusually large but could shrink in 2025.?
• If it tightens toward 1 percentage point, mortgage rates may drop.?
• Increased demand for mortgage bonds from investors, banks, and funds could help close the gap as the Fed slows rate cuts and volatility decreases.

Harry Mills | Director, Oku Markets

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