Did US debt always rise or fall less before and after the Federal Reserve's decision? Tonight we'll see if Powell can be “powerful”... ·  Jan 31 11:50

① Historical statistics show that before and after the Federal Reserve's decisions in the past few years can often trigger a rebound in US bond prices; ② Judging from cross-asset correlation, this may also be good news for investors in US stocks and emerging markets... ③ Of course, it is still unknown whether this scene will continue to work in the future and even during this week's interest rate discussion week.

Financial Services Association, January 31 (Editor: Xiaoxiang) For traders who are worried that Powell will overturn the market's interest rate cut bets on Wednesday, triggering a sharp drop in the bond market, historical statistics may give them some confidence — the Federal Reserve's decisions in the past few years are often more likely to trigger a rebound in US bond prices. Judging from the cross-asset correlation, this may also be good news for investors in US stocks and emerging markets...

According to industry statistics, although the Federal Reserve has implemented the most aggressive monetary tightening policy in decades since March 2022 — the cumulative rate hike has reached an astonishing 525 basis points so far, the three trading days before and after, including the day the Fed's decision was issued, often gave bond market investors a respite.

During this period, 10-year US Treasury yields actually fell by a total of 67 basis points in the three days before and after the interest rate discussion date, breaking the situation where they had already risen sharply. As a comparison, the 10-year US Treasury yield increased by 246 basis points on the other trading days excluding the three days before and after the interest rate resolution date.

And if you keep an eye on it for a longer time, this rule isn't just becoming popular in recent years.

In the 11 years up to 2021, US bonds were in a long-term bull market (10-year Treasury yields fell all the way down), and the yield decline of almost 90% also occurred before and after the Federal Reserve's decision. Economist Sebastian Hillenbrand, who currently teaches at Harvard Business School, discovered a similar pattern, and his research dates back to 1989.

Few people can fully explain why US bond yields often fall around the time of the Federal Reserve's interest rate discussions.

But for some investors, this seems to prove the existence of “Fed put options.” Or in other words, traders have long been inclined to hear dovish information from the Federal Reserve. They expect the Fed to cut interest rates whenever the market or economy is in trouble.

As for why this situation has continued to occur during the period of rising interest rates in the past two years, it may reflect that traders are able to predict how the Federal Reserve will respond to economic data, so interest rate pricing is often digested ahead of schedule. Ultimately, when policymakers take austerity actions in line with market expectations, US debt can instead rise in a relaxed manner.

Hillenbrand once wrote a doctoral dissertation on this phenomenon. He said that the recent situation may be that as soaring inflation after the pandemic gradually subsides, people are bursting with confidence that the Federal Reserve's benchmark interest rate will eventually fall back.

He also pointed out that the Federal Reserve's decision to keep the neutral interest rate — that is, at 2.5%, which has no impact on economic growth — has also strengthened this confidence. This neutral interest rate is less than half of the Federal Reserve's current benchmark interest rate range of 5.25% to 5.5%.

Hillenbrand said, “If you take this model seriously, the yield is bound to decline.”

Tonight, let's see if Powell can still be “powerful”?

Of course, the above historical market statistics are, after all, just a summary of past experiences. Whether they will still work well in the future and even this week's interest rate week is still unknown.

In fact, even though US bond yields have declined cumulatively during the Federal Reserve's decision window, US bond yields have risen around 6 meetings in the past 15 meetings.

Tonight's US Federal Reserve's decision does not rule out the possibility of breaking long-term rules, because once Federal Reserve Chairman Powell dampens the market's aggressive interest rate cut expectations, traders will be very disappointed. Currently, some market traders still expect the Federal Reserve to cut interest rates as early as March, and believe that the Federal Reserve will continue to cut interest rates during the year at a faster rate than the bitmap forecast.

Overnight, on the first day that the three-day window period began to be timed, the US bond market was once suppressed in the short term due to hot employment data. By the end of the New York session, US Treasury yields had mixed ups and downs. 2-year US Treasury yields rose 2.1 basis points to 4.347%, and 10-year US Treasury yields fell 4.4 basis points to 4.037%.

Judging from the latest data, the December job vacancy report released on Tuesday exceeded the forecasts of all economists surveyed by the media. According to the Job Vacancies and Labor Mobility Survey (JOLTS) released by the US Bureau of Labor Statistics, the number of job vacancies increased to 9 million in December, and the previous month's data was also revised to 8.9 million.

After the job vacancy report highlighted the strong performance of the labor market, interest rate market traders further lowered their bets on the Fed's interest rate cut during the year on Tuesday. The possibility of interest rate cuts in March has now dropped to about one-third. Priya Misra, portfolio manager at J.P. Morgan Chase Investment Management, said that the above data has reduced the pressure on the Federal Reserve to start slowing down the pace of contraction and the normalization of interest rates. The Federal Reserve will continue to buy time and may not promise any easing measures at the moment.

It is worth mentioning that before the announcement of the first Federal Reserve resolution of 2024 tonight, although Fed officials have already begun discussions on reducing borrowing costs, they have also expressed many times that they hope to see the pressure on inflation continue to recede before starting to cut interest rates.

In the US bond options market, it can be seen that the capital flow on Monday and Tuesday was seriously biased in favor of treasury bond put options, with the goal of boosting the 10-year US bond yield to 4.45%. One of the most popular put options aims to bet that the 10-year Treasury yield will rise to 4.3% before Friday's close. In addition to the Federal Reserve's decision, the US Treasury's quarterly refinancing plan on Wednesday and Friday's non-farm payrolls data will also have a critical impact on the trend of US debt.


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