To The Moon

As the Federal Reserve concludes its tightening cycle, an increasing number of Wall Street investors are betting on a substantial rebound in U.S. bond prices.

The dovish signals from the Federal Reserve for the upcoming year have triggered exuberance in both U.S. stock and bond markets.

As widely anticipated, the Federal Reserve, in three consecutive monetary policy meetings, maintained unchanged interest rates while softening its stance on rate hikes in its guidance. It expressed a willingness to consider "any" additional tightening and acknowledged the past year's inflation slowdown. The dot plot revealed that over half of Fed officials anticipate at least three rate cuts next year, aligning with the median projection suggesting a total of three cuts. In contrast, the latest economist survey median indicated an expectation of two rate cuts in the coming year. $Post(POST)$-meeting, Federal Reserve Chairman $Powell(POWL)$ noted it was premature to speculate on the timing of monetary easing but confirmed that rate cuts were discussed during the meeting.

Following the Fed's decision, the 10-year U.S. Treasury note yield swiftly fell below 4.10%, approaching 4.00%, marking a three-month low. The 2-year U.S. Treasury note yield also dipped below 4.60%, briefly reaching below 4.43%, registering a daily decline of over 30 basis points.

With the Federal Reserve's tightening cycle concluding, more Wall Street capital is optimistic about a substantial rebound in U.S. bond prices. Noteworthy is the recent performance of several prominent U.S. bond ETFs:

Amidst this optimism, Direxion's triple-long U.S. bond ETF, TMF, witnessed a record single-day net inflow of $205 million last Friday.

Behind this trend lies not only the widespread belief on Wall Street that the Federal Reserve's tightening cycle has ended but also a strong conviction that the Federal Reserve is likely to initiate interest rate cuts soon. This anticipation is fueling expectations for further gains in U.S. bond prices and a significant decline in bond yields, as revealed by a Wall Street hedge fund manager.

This fervor for U.S. bonds is evident in this week's U.S. Treasury bond issuance market.

In the early hours of December 13th, the U.S. Treasury successfully raised $21 billion in a U.S. Treasury bond issuance, with a bid rate of 4.344%, significantly lower than November's bid rate by 42.5 basis points and below the pre-issuance rate of 4.347%.

This surge in demand is reflected in the bid-to-cover ratio, reaching 2.43 for the U.S. Treasury bond sale, the highest since September and surpassing the average of the last six sales at 2.40.

The evolving market environment is markedly different from two months ago, with increasing discussions among Wall Street institutions about the possibility of the Federal Reserve cutting interest rates as early as March next year. This is sparking heightened market expectations for rising U.S. bond prices and triggering a buying frenzy for U.S. bonds, according to the aforementioned Wall Street hedge fund manager.

Recent trading data from the U.S. interest rate swap market indicates a growing number of Wall Street institutions and traders betting on the Federal Reserve initiating interest rate cuts as early as March next year.

Mohamed El-Erian, Chief Economic Adviser at Allianz Group, warns that despite investor expectations of a slowdown in the U.S. economy in 2024 being correct, the predicted extent of rate cuts will likely occur only in the event of an economic recession. He anticipates the Federal Reserve to continue exercising caution in its monetary policy shift.

$Goldman Sachs(GS)$ strategist Praveen Korapaty's latest report suggests a market expectation of a 125 basis point cut in the next 12 months, with at least a 50 basis point cut by mid-2023. However, $Goldman Sachs(GS)$ holds a more conservative outlook, predicting a single 25 basis point rate cut by the end of 2024.