To The Moon

Last night, $S&P 500(.SPX)$ recorded its largest single-day gain in nearly three months. At the same time, yields on various maturities of US Treasuries sharply retreated from their recent highs.

Traders in the interest rate markets are betting that the latest signs of a slowdown in the US job market will ease pressure on the Federal Reserve to raise interest rates further this year.

Among them, the 2-year Treasury yield fell by 15.2 basis points to 4.905%, the 5-year Treasury yield dropped by 12.2 basis points to 4.282%, the 10-year Treasury yield declined by 8.1 basis points to 4.126%, and the 30-year Treasury yield fell by 4.6 basis points to 4.233%.

Data released on Tuesday showed signs of a cooling US economy, indicating that the comprehensive impact of tightening policies is continuing to manifest. The monthly Job Openings and Labor Turnover Survey (JOLTS) report from the US Department of Labor, released on Tuesday, showed that job vacancies in the US dropped to 8.827 million in July, a much larger decline than economists had predicted. The report also indicated a slowdown in hiring, while layoffs remained stable. Analysts believe that this will help the Federal Reserve continue to make progress in curbing inflation.

At the same time, the Conference Board's Consumer Confidence Index for August fell by 7.9 points to 106.1, well below the market expectation of 116.0.

The volatility in US Treasury yields may not subside easily

Just a week ago, the US Treasury market was experiencing unprecedented selling pressure, causing yields to surge. The yield on the 10-year US Treasury Inflation-Protected Securities (TIPS) reached 1.84%, the highest level since 2009. In addition, the yield on the 30-year TIPS touched the key 2% level for the first time in over a decade.

Meanwhile, nominal US Treasury yields were also rising, with the 10-year Treasury yield reaching 4.215% on August 14th, an all-time high since November 8th of the previous year, before falling to 4.182%. The 2-year Treasury yield rose by 7 basis points to 4.965%, the highest since July 7th.

Behind the recent rise in nominal and real US Treasury yields, there are concerns in the market about inflation. While the recent core CPI in the US decreased and consumer inflation expectations fell, the overall CPI rebounded for the first time after 12 consecutive declines. Additionally, PPI data exceeded expectations. These factors have intensified concerns in the market about inflation's stickiness, and investors are reluctant to buy bonds.

Moreover, the US government's borrowing needs are significant. The downgrading of the US government's sovereign credit rating by S&P has increased the government's financing costs. Coupled with the continued implementation of a tightening monetary policy by the Federal Reserve, this has led to the recent rise in nominal US Treasury yields, with real yields following suit.

Is this drop in US Treasury yields short-term or long-term?

Looking ahead, the volatility in US Treasury yields may continue, with short-term fluctuations in a few specific indicators causing temporary turbulence. However, from a trend perspective, it seems that concerns about US inflation remain strong, and US Treasury yields may continue to fluctuate at high levels in the long term.

So, how can retail investors profit from the current volatility in the bond market?

A prominent expert in the community, who has been studying the bond market for a long time, suggests that a combination of long and short-term bond yield hedging strategies in the bond market may be a better approach.

Focus on hedging opportunities in long and short-term bonds

In the current market, relatively certain opportunities lie in the US Treasury market. It is well-known that the Federal Reserve's rate hiking cycle is coming to an end, and the key difference lies in when it will enter a rate-cutting cycle. If it enters a rate-cutting cycle, the yield on 2-year Treasury bonds will fall more than that of 10-year Treasury bonds. Historically, when the yield on 2-year Treasury bonds inverts with that of 10-year Treasury bonds, the final result will return to normal levels (meaning the yield on 10-year Treasury bonds is higher than that of 2-year Treasury bonds). So, this strategy is essentially about observing when the Federal Reserve will cut rates.

Historically, the bottom range when the yield on the 10-year Treasury bonds inverts with that of the 2-year Treasury bonds is around -1%. Of course, when it will return depends on the Federal Reserve's policy, but the bottom range is relatively certain. The remaining question is when the yield differential between the two returns to above the 0, at which point we can profit.

How to trade US Treasury yields?

You can add these tickers to your watchlist on Tiger Trade because it is the most straightforward way to trade government bond yields.

The trading method is also simple: go long on the 10-year Treasury yield and short the 2-year Treasury yield (remember that yield and bond prices move inversely, so be aware of this), compared to directly trading bond futures. Yield futures do not require you to calculate real yields yourself, and the hedging combination is more intuitive. You can take profits when the yield differential between the two returns to 0.

Pay attention to the US Treasury varieties currently available for trading on the Tiger app:

- $10-YR T-NOTE - main 2312(ZNmain)$

- $2-YR T-NOTE - main 2312(ZTmain)$

- $Micro 2-Year Yield - main 2309(2YYmain)$

- $Micro 10-Year Yield - main 2309(10Ymain)$

Finally, a reminder: US Treasury bond prices move inversely to US Treasury bond yields.