The u.s. treasury yield saw the largest weekly increase in weeks on Monday, $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ rising to 4.2%, the market is reassessing expectations for Fed rate cuts and evaluating the possibility of a soft landing for the U.S. economy.

As the U.S. election approaches, Trump's momentum of winning becomes increasingly apparent. Druckenmiller, a former colleague of Soros and the Chairman and CEO of a family office, stated in an interview last Wednesday that the market has priced in Trump's victory in next month's U.S. presidential election. He emphasized the need for the market to lower expectations on the speed and magnitude of Fed easing. He also mentioned going short on treasuries when the Fed announced a 50 basis point rate cut in September to hedge his positions.

The U.S. bond market under "Trump wins the election" + "economic soft landing" may face inflation resurgence positively. ETF options implied volatility shows that the market expects increased price fluctuations in U.S. bonds.

Data supports a "slow rate cut", pre-silence period sees a collective hawkish tone from Fed officials.

The Federal Reserve's significant interest rate cut has somewhat boosted the U.S. stock market, with the s&p 500 index setting new historical records in recent weeks, but it will soon be interrupted by strong economic data from the usa.

Last Friday, following the release of the better-than-expected CPI and non-farm payrolls reports, the U.S. retail sales data once again exceeded expectations, indicating strong economic momentum and further strengthening the view that the economy is far from entering a recession. Expectations for rate cuts plummeted, but at the same time reignited concerns about a resurgence in inflation, putting pressure on the U.S. bond market.

Unfortunately, ahead of the November meeting, several Federal Reserve officials expressed cautious views this Monday.

Dallas Fed President Lorie Logan stated that in a highly uncertain economic situation, officials should act cautiously and she supports a "gradual" rate cut approach.

Kansas City Fed President Jeffrey Schmid expressed his desire for a more normalized policy cycle, where the Fed can make moderate adjustments to maintain economic growth, price stability, and full employment. Slowing down the pace of rate cuts would help the Fed find a so-called neutral level, where policies neither create pressure nor stimulate the economy.

Minneapolis Fed President Kashkari said that he supported the significant rate cut by the Fed last month, but reiterated his support for slower rate cuts over the next few quarters. "I currently expect some more gradual rate cuts over the next few quarters to bring rates to a neutral level, but this will depend on the data."

After Monday, U.S. bond yields surged, leading the market to further reduce its forecast for the magnitude of Fed rate cuts this year: a 13% probability of no rate cut in November, and a 96.8% probability of only a 25 basis point rate cut within the year.

Arif Husain, Chief Investment Officer of Fixed Income at T. Rowe, pointed out that the 10-year U.S. Treasury yield will test the 5% threshold in the next 6 months, making the yield curve steeper. The fastest path to reach this threshold would be with a slight Fed rate cut.

Will President Trump's reelection make the Federal Reserve more hawkish?

The upcoming U.S. presidential election on November 5th is keeping the market tense, and as these events unfold, investors are preparing for a potentially volatile market period.

Whether Trump or Harris is elected president, there is a possibility of expanding the U.S. budget deficit, as neither has made reducing the deficit a key element of their campaign, but rather focusing on increasing government spending, tax cuts, and economic stimulus policies that could lead to inflation.

Historically, the Republican Party tends to pursue tax reduction policies, while the Democratic Party is more likely to promote increased public investment and social welfare spending. These policies could all lead to an expansion of the budget deficit, making the U.S. government debt a key risk for market participants.

Soros's former colleague, and Chairman and CEO of the family office, Druckenmiller, stated in an interview last Wednesday that Trump will win the upcoming U.S. presidential election next month. He mentioned that the market needs to lower its expectations for the speed and magnitude of Fed easing and revealed that he shorted U.S. bonds to hedge his positions when the Fed announced a 50 basis point rate cut in September.

According to attendees, betting on a decline in U.S. bonds now represents 15% to 20% of Druckenmiller's investment portfolio. Druckenmiller mentioned that he is uncertain how long it will take for this trade to unfold, stating it could be six months or six years. Additionally, he expressed concerns about the 'fiscal recklessness' of both parties.

Regarding the rumor of the 'shadow chairman of the Fed,' Druckenmiller described it as a 'frightening idea.' Reports indicate Trump's senior economic and financial advisor Scott Bessent proposed the idea of a 'shadow chairman of the Fed.'

Bessent believes that Congress could approve the next Fed chair's nominee a year in advance, which would weaken Powell's influence, as the nominated shadow chairman would lead the Fed's policy direction. It is noteworthy that Bessent himself also worked at Soros Fund Management.

The volatilities of the U.S. treasury bond ETF options have risen to a new high level, and the market expects an increase in price fluctuations.

In the options market, implied volatility is the market's expectation of the future volatility of the underlying asset. When the implied volatility level rises to a high point, it means that the market expects the future price volatility of the underlying asset to increase, leading to higher expectations of uncertainty and risk from investors towards the future market.

According to Barchart data, $iShares 20+ Year Treasury Bond ETF (TLT.US)$ on Monday, the options implied volatility level rose to 66.46%, and the options implied volatility percentile increased to 95%.

According to data from unusualwhales, in the TLT options expiring after the U.S. presidential election, the most open interest belongs to the call options expiring on December 20 this year with a strike price of $102, with nearly 0.1 million contracts open.

Further investigation into recent large unusual options trades revealed that on October 17, 0.0234 million call options with a strike price of $95 expiring on January 7, 2025 were sold, involving nearly $6 million.

Editor/Rocky