The US Treasury has announced that it needs to borrow a total of $1.007 trillion for the September quarter. This is an increase of $453 billion compared to the initial forecast in April. The increase in borrowing stems from lower cash reserves at the beginning of the quarter. For the October to December period, the Treasury plans to borrow $590 billion, aiming to have cash balances of $850 billion by the end of December.

Key Factors to Watch

According to Michalowski, the significant rise in government bond supply is crucial. This increase in Treasury bonds is likely to lower bond prices, which will subsequently push interest rates higher. This situation presents a clear opportunity to invest in rising yields. Typically, this environment is challenging for stocks, especially for growth companies sensitive to higher borrowing costs. After this news emerged, the CBOE Volatility Index (VIX), a major indicator of market fear, jumped from below 14 to over 17 in early August. This suggests it’s wise to consider protective put options on major equity indices like the S&P 500 or Nasdaq 100. For direct investment, we are focusing on interest rate derivatives. The 10-year Treasury yield increased from about 3.8% before the announcement to over 4.2% recently, surpassing key technical levels. This supports strategies like shorting Treasury bond futures or buying puts on bond ETFs such as TLT.

Impact of US Credit Rating Downgrade

This situation is made more complex by Fitch Ratings’ recent downgrade of the U.S. credit rating due to the rising debt burden. Historically, such downgrades can undermine investor confidence and increase government borrowing costs. This external validation reinforces the case for a higher-yield environment. Higher U.S. interest rates compared to other countries could attract foreign investment, boosting demand for the U.S. dollar. The U.S. Dollar Index (DXY) has already risen over 2.5% since late July. We expect this strength to continue, making long positions in the dollar against other currencies an appealing strategy. Create your live VT Markets account and start trading now.

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