Warning Signs from US Treasuries

Last week’s US jobs data underscored the strength of the labour market, delivering a standout trio combo of 256k new jobs added in December (the second-highest for 2024), a 3.9% YoY rise in average hourly earnings (higher than pre-Covid 19 average of ~3%), and a steady unemployment rate at 4.1% (down 0.1% MoM). While these numbers are undeniably strong, they set a different tone for equity markets, as assumptions on inflation and rate cuts, need to be revisited to the downside.

The spillover effects on Malaysia are likely to be manageable. The MYR will face pressure, Malaysia bonds will see further selloff by foreigners, and equities will track US market weakness with the index constituents bearing the brunt. On the positive side, pro strong USD stocks will benefit, commodities are firming up, and gold is surging. With President Trump’s inauguration just a week away, followed by CNY and the Ramadan fasting month, adopting a defensive portfolio strategy for 1Q25 seems prudent.

Rate Cuts Will Have to Wait

The flip side of a strong labour market is that it implies that consumers can afford to pay more—and this logic extends to Treasury yields. This underscores why inflationary pressures remain persistent and lowering inflation to the Fed’s 2% target remains such a challenge. Moreover, there are concrete signs pointing to interest rates staying elevated— or even moving higher—from here. We list them below.

i. Record Debts Maturing that Needs to be Rolled Over

US total public debt as at end of 2024 was at USD36.2 trillion (Source: US Department of Treasury). It has grown at a 58-year CAGR of 8.5% (1996–2024). Notably, this pace accelerated to 11.8% since 2020, driven by pandemic-related stimulus measures.

Based on Federal Reserve data, we estimate approximately US$6 trillion of debt maturing in 2025 will require refinancing. Combined with an additional US$2–3 trillion to fund budget deficits, the Fed is likely to issue $8–9 trillion of treasuries for the year, making 2025 the second-largest year for debt issuance after the pandemic-driven spike in 2020.

However, unlike 2020’s crisis-era dynamics, today’s economy is healthy, and investors will demand higher yields to absorb this monumental supply of debt.

Source: BIMB Securities Research - 13 Jan 2025