To The Moon

In the past few trading days, bond market volatility has been fluctuating significantly, similar to the stock index. In addition, the Fed Watch of the Chicago Mercantile Exchange has also been up and down, making it worth discussing bond market trends and views.

The bank run has caused some special changes in the current market, and the expected pace of interest rate hikes is as follows:

➡ On 2/14, the announcement of January CPI resulted in a higher year-on-year increase, causing the market to expect an interest rate hike in June to 5-5.75% (an increase of 2 digits, and 20Y also increased by 2 digits, causing TMF to fall to around 7.3)

➡ After the incident of Silicon Valley Bank on 3/8, the expected rate hike remained (maintaining the original path, 20Y dropped two digits in two days, TMF rose to a high of 9.6 and then the Fed intervened, causing the yield to rise by more than 1 digit)

➡ The incident involving Credit Suisse on 3/15 (although not news) caused the market to expect a 4-digit interest rate cut by the end of the year (20Y dropped by more than 1 digit again, reaching a previous low of 3.7%, but 1Y yield that day dropped by 2 digits, reaching a minimum of 4.01%)

Just from the recent timeline, several conclusions can be drawn:

* Don't look at technical analysis for bonds, it reflects the yield accurately.

* The 1Y yield will 'quickly' respond to Fed Watch, so buying bonds based on news will be at the highest point.

* Compared with a month ago, the entire US bond yield has shifted down, but the decline in short-term yields is higher than that of long-term yields, indicating a narrowing spread.

* The key point is that the short-term decline in long-term bond yields (20Y) still maintains a range of 2 digits, far lower than the 4 digits change in short-term bond yields (1Y).

I have mentioned the reasons for this in my recent views, and I will explain my calculation logic for long-term bond yields. However, this will directly raise a flag:

1. First, basic knowledge: The Federal Reserve's benchmark interest rate determines short-term yields (below 1Y), and longer-term bond yields depend more on market expectations, which should be memorized.

2. Generally, long-term bond yields are higher than short-term bond yields by 1%, which is a healthier yield curve. Of course, this is not the case now, but this will be a parameter I use for reference.

3. Currently, the 1-year bond yield is closely linked to Fed Watch. This prediction is adjusted after every FOMC meeting and is directly reflected in the bond prices. Before the meetings, the 1-year bond yield typically follows the Fed Watch, which is reasonable.

4. Previously, the 20-year bond yield was benchmarked at 3.75% with the 1-year bond yield at 4.75%. Therefore, based on the Fed's last announced interest rate endpoint, the 20-year bond yield ceiling is between 4-4.25%. I use this bond yield to place my order for TMF.

5. Assuming the expected final inflation rate is 2.5%, the expected final 1-year bond yield will drop to 2.5%-3%, and the long-term bond yield will be 1% higher than the short-term bond yield. Based on the expected normal inflation decline and the Fed's interest rate cut expectations, the conclusion is that the 20-year US bond yield may only reach 3.5%.

6. This means that as long as there is no major recession with significant interest rate cuts and as long as the 20-year bond yield remains below 3.5%, I will sell TMF (but it is unlikely that I will reverse to TMV). If the bond yield is above 4%, I will continue to buy TMF.

7. Yes, I believe that under normal, non-collapse conditions, the Fed may only cut interest rates to around 3%, so the 20-year bond yield will be around 3.5%. That's right! This is my flag 🚩.

8. Another flag 🚩 I have is that I predict the next big drop in bond yields will come after the heat of this event has subsided and during the FOMC meeting (except for chain reactions). I predict that the Fed will only explain that they have many tools to prevent such events from happening, and that interest rate hikes have not caused major crises. Therefore, the 1-year bond yield will probably return to between 4.75% and 5%, but due to market expectations, the probability of the 20-year bond yield returning to above 4% is very low, and it is likely to fluctuate around 4%. If there are concerns about interest rate hikes and the yield is above 4%, I will buy more TMF.

9. As for corporate bonds, we can see from this event that corporate bond yields rise and fall, but during the overall economic downturn, corporate bonds will experience selling pressure like company stocks, while high-yield government bonds will receive a large amount of buying pressure. This back-and-forth investment return can be very different. I use 45% of TMF to make up for the loss of 55% leveraged ETF stop-loss.

This article can be kept for future reference to see if the logic is correct. When buying and selling, in addition to looking at the current value of the 20-year bond yield, it is important to understand the reasons behind the current value, which is the most important thing when operating long-term bonds. As for short-term bonds, it depends on interest rate cuts. If you don't use leverage, the return will be low, but there is no need to do calculations.

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