To The Moon

Currently, the U.S. Federal Reserve is navigating a similar scenario. During its rate-cutting process, it closely monitors market reactions. If the economy continues to perform strongly and inflation remains high, further rate cuts may not be necessary. However, markets often overreact during such periods, which seems to be the case with the recent fluctuations in bond yields.

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For example, the yield on 10-year U.S. Treasury bonds recently exceeded the Federal Reserve's target range of 4.25%–4.5%, reaching as high as 4.632%. This implies that the bond market is effectively imposing its own version of financial tightening. While the Federal Reserve has projected two rate cuts next year, market sentiment has turned more pessimistic, pricing in only one. I view this as an overreaction.

It’s worth noting that market expectations are frequently inaccurate. For instance:

At the end of 2021, markets anticipated three rate hikes in 2022, but there were 17.

By late 2022, markets expected just one rate hike in 2023, but there were four.

At the end of last year, markets predicted six rate cuts in 2024, but only four have materialized.

Such misjudgments often mirror stock trading behaviors, where optimistic projections about a company's performance may lead to disappointment, and pessimistic forecasts can be surprisingly outperformed.

For traders, the key lies in adopting contrarian strategies during periods of extreme optimism or pessimism. At present, the bond market seems to be in a state of overreaction. On Friday, December 27, Treasury Secretary Janet Yellen warned Congress of the need for "extraordinary measures" by mid-January to prevent the U.S. from defaulting on its national debt. This announcement triggered a sell-off in both the bond and stock markets.

As mentioned earlier, the 10-year U.S. Treasury yield has surpassed 4.6%, exceeding the Federal Reserve's current rate and factoring in the potential for two rate cuts next year. I believe this marks a bottom for bond prices, signaling the start of a reversal. Consequently, the stock market is likely poised for a rally.

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