To The Moon

Recently, $US10Y(US10Y.BOND)$ yield has surged to 4.5%, rising 80 basis points from its low a month ago. This change has sparked widespread attention in the market, especially against the backdrop of the Federal Reserve's unexpected 50 basis point rate cut on September 17. At this time, market expectations for rate cuts and economic recession were at their peak, and looking back at history, this moment coincidentally marks the bottom of interest rates. $iShares 20+ Year Treasury Bond ETF(TLT)$ $

The Upward Trend

Overextended Expectations

Firstly, market expectations for rate cuts have been overextended. Over the past year, any point in time when rates were projected to decline almost always turned out to be reversed. When rate cuts are realized, interest rates may have already bottomed out, similar to the situation in 2019. If investors continue to bet against interest rates and increase bond holdings during a rate cut, they are essentially making the wrong move.

Reflexivity of Interest Rates

Secondly, interest rates have an inherent reflexivity. Excessive rate cuts can actually prevent further declines in rates because lower financing costs stimulate economic growth, thereby reducing the need for rate cuts. This scenario is particularly evident in the current economic environment.

Impact of Trump Trades

Lastly, the strong return of Trump trades has also provided new momentum for rising interest rates. In an environment of increasing market volatility, investor uncertainty about future policy directions has led to an uptick in interest rates.

Forecasting Interest Rate Trends

Characteristics of Rate Fluctuations

It is noteworthy that both upward and downward movements in interest rates can exhibit overshooting behavior. The previous drop below 3.7% surprised many in the market. Based on different methods like natural interest rates, the central level is estimated between 3.8% and 4%. However, once this level is breached, it may not quickly revert back, as seen multiple times over the past year.

Trading Opportunities and Outlook

Before another rate cut occurs, there may still be trading opportunities in the market. Although excessively high rates could trigger reflexive effects, they are unlikely to halt cuts immediately; currently, CME futures still price in a likelihood of a November cut. However, breaking through previous lows will be quite challenging. The natural trend of recovery in U.S. fundamentals combined with policy changes post-election makes further downward trends difficult.

Analysis of Election Impact

After Trump's victory in 2016, interest rates surged by 80 basis points. If a significant upward movement occurs again post-election this time around, investors are advised to consider going long cautiously. Once fundamentals improve and election policies become clearer, this downtrend cycle may conclude.

Conclusion

In summary, the rapid rise in U.S. 10-year Treasury yields results from multiple factors including overextended market expectations, reflexivity of interest rates themselves, and influences from Trump trades. In the coming period, investors should pay close attention to the upcoming elections and their potential impact on markets. Additionally, after improvements in fundamentals and clarity in policies emerge, it may be prudent to consider increasing exposure to risk assets to navigate possible market fluctuations.