Original author: Dong Jing
Source: Wall Street Journal
The U.S. Treasury market experienced its largest single-day decline in yields since the regional bank crisis in March 2023 on October 22, with yields across all maturities falling by 15 to 21 basis points, and the 10-year U.S. Treasury yield closing at 4.95%.
According to Zhui Feng Trading Desk, J.P. Morgan stated in a research report on October 22 that this sudden "risk-off rally" was triggered by the European sovereign debt turmoil and sustained weakness in Nasdaq tech stocks, not by any substantive improvement in U.S. fundamentals.
Reports indicate that, despite widespread rhetoric about "de-dollarization" at the macro level, real data shows overseas private capital continues to flood into the long-end U.S. Treasury market, treating it as the ultimate safe haven. Looking ahead, the 10-year U.S. Treasury yield has reached the key resistance zone of 4.94%-5.02%; however, do not轻易 short this rally until risk assets show clear stabilization.
On strategy, J.P. Morgan recommends maintaining the 10-year/30-year U.S. Treasury yield curve steepener trade (10s/30s steepeners) as the optimal choice currently, balancing the benefits of front-end yield declines with relative value.
Catalyst: Spreading European debt crisis coupled with a sharp decline in tech stocks
The recent sharp decline in U.S. Treasury yields was triggered by developments across the Atlantic. The spread between French OATs and German Bunds widened by another 15 basis points in a single day, reaching levels not seen since the height of the European periphery debt crisis in 2011. J.P. Morgan’s Europe team noted that there was no clear catalyst for this week’s widening spread, but the escalation of protests in France over the weekend may have further weighed on market sentiment.
The JPMorgan Europe team believes that breaking the current cycle of widening French spreads requires one of the following: an improvement in French fiscal or political dynamics, or a signal from the European Central Bank indicating potential intervention.
Notably, even after the European market close, the decline in U.S. Treasury yields continued, with persistent weakness in tech stocks serving as another key driver.
Driving logic: Tech stocks have become the dominant variable for U.S. Treasury yields.
JPMorgan data shows that over the past month, the rolling correlation between U.S. Treasury yields and the Nasdaq 100 Index has risen significantly, while exhibiting a negative correlation with Brent crude oil prices. This relationship has a logical foundation: at the outset of the Middle East conflict, when Brent crude surpassed $110 per barrel, U.S. Treasury yields began to show negative sensitivity to oil prices.
Looking ahead, J.P. Morgan believes that, despite the resilience of the U.S. economy, the stock market has become the dominant force in pricing interest rates. J.P. Morgan’s equity team previously noted that rising interest rates would pressure stock valuation multiples—as discount rates increase and inflation expectations rise, valuations will be compressed. Depending on different economic growth scenarios, this compression effect begins to emerge when the 10-year yield reaches between 5% and 6%.
In the above context, JPMorgan tends to hold trading positions that benefit from declining short-term yields while offering relative value.
Specifically, the 10s/30s yield curve is primarily driven by medium-term Fed policy expectations, but over the past two weeks, the curve has shown a明显滞后 in responding to the repricing of Fed expectations.
Based on this, J.P. Morgan believes the 10s/30s curve is currently flattened by approximately 6 basis points and continues to recommend maintaining a 10s/30s steepening position, positioning it as a low-beta long exposure with relative value characteristics.
Primary market demand: Long-term demand has reached an all-time high, with significantly increased foreign participation.
Despite increased market volatility, overall demand for U.S. Treasuries in the primary market remained strong.
Key data as follows:
Terminal demand for the 10-year and 30-year Treasury auctions both reached record highs, averaging 90.6% and 90.1% respectively;
Medium-term demand, while down from the 2025 historical high, remains strong by historical standards.
The significant increase in foreign participation has been the core driver of demand. Foreign participation rates surged sharply in March following the outbreak of the Middle East conflict and rose again markedly in September when yields were repriced to multi-decade highs. In mid-September auctions, foreign participation rates reached among the highest levels on record.
JPMorgan Chase concludes that the increase in foreign demand is primarily concentrated in the long end, indicating that the funding sources are mainly foreign private investors (official holdings typically focus on the short end for easier liquidity during periods of financial stress). This aligns with the August TIC data, which shows that foreign investors purchased long-term U.S. Treasuries at the fastest net pace in over a year, driven primarily by foreign private demand.
JPMorgan Chase clearly states: Despite growing concerns about "de-dollarization," data shows that foreign participation in the U.S. Treasury market remains strong. During periods of stress, global investors continue to increase their holdings of U.S. Treasuries, which remain the deepest and largest sovereign debt market in the world.
Auction spread widening: Increased price sensitivity or volatility effect?
Notably, strong end-demand has not translated into narrower auction tails. Since 2026, average auction tails have widened across nearly all maturities (with the exception of the long end).
JPMorgan proposes two possible explanations:
Foreign private investors are more price-sensitive: as their share in primary demand increases, their sensitivity to price exceeds that of less price-sensitive official sector counterparties, consistent with the overall trend in the U.S. Treasury market in recent years;
The natural consequence of rising interest rate volatility: especially the increase in intraday volatility, naturally leads to wider tails. The auction tails widened during the market volatility triggered by the March conflict and surged again during the yield repricing in September.
The long end is a significant exception—the tail spreads for long-end auctions have actually narrowed this year. J.P. Morgan believes that, given the ongoing expansion of the funding gap over the coming years, reducing long-end issuance would already be unwise; the strong performance of long-end auctions further underscores that such adjustments are unnecessary.
Technical analysis: The rebound has reached a key resistance zone; it is not advisable to go short against the trend.
From a technical perspective, the rebound in the 10-year U.S. Treasury yield has accelerated and reached JPMorgan’s previously marked first major resistance zone of 4.94%-5.02%. This zone converges multiple technical signals: the cycle high from October 2023; the 38.2% Fibonacci retracement level from June; the 50-day moving average; and the measured move target from the October yield top pattern.
JPMorgan Chase assesses that the market may consolidate near this range in the short term, but it is not advisable to short the current rebound until clear signs of stabilization or a bottom emerge in risk asset markets. Currently, most risk asset markets are still accelerating downward, with some having broken below key support levels, and no signs of stabilization yet.
If the rebound continues, the next major resistance zone is located at 4.75%-4.81%, which includes: the 38.2% Fibonacci retracement level from March 2026 (4.81%); the yield high from January 2025 (4.805%); and the summer breakdown level (4.73%-4.75%).
Upside direction; tactical support is located at the 5.035%-5.05% hourly pivot levels; the October 15 gap at 5.15%-5.185% has become a significant support zone given the strong downward yield shock since then.