Guolian Minsheng: U.S. Treasury Pricing Framework Shifts to Fiscal Risk Premium Dominance
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A Guolian Minsheng Securities report argues U.S. Treasury pricing is moving from a single rate-cut narrative to a fiscal deficit + supply-demand mismatch + inflation risk triple driver, with yield-curve steepening likely the dominant trade in the second half.
What changed between H1 and H2 in what drives Treasury yields?
In H1, the 10-year yield rose 23 basis points. Roughly 65% came from expected short-term real rates — the market traded around "resilient economy → delayed rate cuts," producing a classic bear-flattening curve.
Since July the picture flipped: the 10-year yield climbed another ~30 bps, almost entirely from term premium — the extra compensation investors demand for holding long-dated bonds. The risk-neutral rate barely moved.
This means → the market is no longer just pricing when the Fed will cut; it is repricing the risk of owning long-dated Treasuries themselves. The long end has pushed to 4.7%.
How large is the fiscal deficit pressure?
On the revenue side, a court ruled IEEPA tariffs — tariffs levied under the International Emergency Economic Powers Act — illegal. The government must refund roughly $166 billion; $81 billion has been paid, with nearly half still outstanding, likely adding about 0.6 percentage points to the deficit ratio.
Replacement tariffs cannot close the gap. The Yale Budget Lab projects 2026 fiscal-year tariff revenue at roughly $80 billion, less than half the $190 billion collected in FY2025. Through FY2036, the IEEPA ruling is estimated to cost ~$1.7 trillion in cumulative revenue; new rules would recover only $950 billion — under 60%.
Spending is rising too: the FY2026 defense budget is about $877 billion, with nearly 80% already spent by June. With midterms approaching, the market expects possible credit-card rate caps and targeted subsidies, fueling expectations of a second fiscal expansion and pushing up Treasury supply premium.
In plain terms = revenue is shrinking, spending is growing, and the government must issue more debt to fill the hole — stacked together, investors naturally demand higher compensation to buy long-dated bonds.
Who is selling Treasuries — and who is stealing the buyers?
Foreign official holders are stepping back: Japan alone net-sold $80 billion in Treasuries from January through May.
Incoming Fed Chair Kevin Warsh's policy stance reinforces expectations of tighter medium-term liquidity, weakening the central bank's backstop for long-duration bonds.
Meanwhile, the AI capex boom is creating a crowding-out effect: Microsoft, Google, META, Amazon, and Oracle spent $180 billion in capital expenditure last quarter (up ~90% year-on-year), with long-term debt reaching $700 billion (nearly double early-2025 levels).
This means → a flood of high-grade corporate bonds is pulling institutional capital away from long-dated Treasuries, forcing Treasuries to offer a higher term premium just to clear the excess duration supply.
Why did Warsh's hawkish stance actually deepen inflation fears?
After the July FOMC meeting, Warsh stressed his anti-inflation resolve — yet actual policy action lagged. The report sums it up as "tough talk, delayed action."
This reflects a "policy-credibility deficit": vocal commitment to fighting inflation paired with inaction leads the market to question whether the medium-term inflation anchor still holds. Forward inflation expectations accelerated upward after late July.
In plain terms = saying the tough thing but not following through doesn't reassure investors — it makes them demand more inflation compensation. The hawkish posture was supposed to hold rates down; instead it backfired.
What variables matter most for the second half?
The report flags four threads: ① whether economic and inflation data continue to cool, bringing down short-term real-rate expectations; ② whether the Trump administration introduces new tariff measures to ease issuance pressure; ③ the evolution of foreign selling and AI corporate-debt crowding out; ④ progress on Warsh's Fed reforms.
Core conclusion: simply betting on rate-cut expectations can no longer single-handedly suppress long-end yields. Pricing power over long-dated Treasuries is shifting rapidly from policy-rate expectations to term premium and supply-demand fundamentals.
This means → yield-curve steepening — long-end rates rising faster than the short end — may be the dominant trade of the second half.
Content is for reference only, not financial advice.