Source: Wall Street See, Author: Li Xiaoyin
The policy proposals of "Trump 2.0" are likely to cause a rebound in inflation expectations, bearish on long-term US bonds. However, current market data shows that US bonds are on the rise across the board, indicating that trades driven by expectations of interest rate cuts are "better".
Traders are increasing their bets that the Fed will cut interest rates in September, with the "rate-cut trade" gaining the upper hand.
In recent days, inflation has fallen and dovish comments by Powell have boosted expectations of a rate cut by the Fed in September, strengthening the power of the "rate-cut trade". On the other hand, after the first round of presidential debates and a shooting incident, Trump's lead in the polls has expanded, bringing back the "Trump trade".
Given Trump's approach of imposing tariffs, limiting immigration and preferring fiscal and monetary stimulus, his "Trump 2.0" policy proposals are likely to lead to a rebound in inflation expectations, which could pose an upward risk to US bond yields, especially long-term bond yields.
And the current market data shows that the entire US bond market is rising, meaning that trades driven by expectations for a rate cut are "winning over" other trades.
Last week, the composite index of US bond prices had wiped out its decline for the year. Since July, the yield on 10-year US Treasuries has fallen by a cumulative 3bp to 4.177.
In the futures market, the number of open contracts and new positions in the Federal Fund futures market for October has soared since mid-last week, betting that the Fed will cut interest rates by 25bp in July and September, or 50bp in September.
Sentiment is also very bullish in the spot market. According to survey data released by JPMorgan on Tuesday, investors' long positions in metals are at their highest level since January, and their net long positions are at their highest in three weeks.
Currently, the swap market is starting to expect that the Fed will cut interest rates twice from September this year, with a probability of about 50% for a total of three rate cuts this year.
CICC: US bond yields could drop below 4% after rate cut is implemented.
As the "rate-cut trade" and "Trump trade" alternate in dominance, US stocks have rebounded, the US bond yield curve has steepened, the US dollar has weakened, and gold, bitcoin, and emerging market currencies have been supported.
Looking ahead, China Securities expects that the steepening of the US Treasury yield curve is a relatively high certainty.
CICC predicts that the US bond yield will fluctuate in the range of 4.2% to 4.7% in the short term, basically corresponding to the expectation of three rate cuts or no rate cuts this year. After the rate cut is implemented, the yield may fall below 4% due to trading factors, and then gradually rebound due to expectations of good growth, turning towards inflation-benefiting assets such as copper and oil and cyclical US stocks.
Editor/Lambor