As the US stock and bond markets officially enter the Christmas holiday this Wednesday, the US bond market is actually experiencing the overlap of three "100s":
Counting the days, it has been nearly 100 days since the Federal Reserve officially began its current round of interest rate cuts on September 18th
During this period, the Federal Reserve has cumulatively cut interest rates by 100 basis points -50 basis points in September, 25 basis points each in November and December;
At the same time as the 100 day and 100 point interest rate cuts, the trend of the US bond market during this period is actually like "raising interest rates" by 100 points - as the 10-year US bond yield rose above the 4.60 mark on Tuesday, this "global asset pricing anchor" has risen by nearly 100 basis points since the Federal Reserve's September interest rate meeting.
In such a scenario, although investors may not feel anything when trading every day - against the backdrop of Trump's return to power in less than a month and the Federal Reserve's "clear indication" that it will slow down interest rate cuts next year, the rise in US bond yields, especially long-term bond yields, itself is not surprising. But when industry insiders review the market during this Christmas holiday, they may still be able to break out in a cold sweat.
In fact, such a trend is extremely rare. In the past forty plus cycles of interest rate cuts, the benchmark 10-year Treasury yield has skyrocketed like this after the Fed cut interest rates, and only once has it been more exaggerated than it is now, which is 1980 that all Wall Street people do not want to recall.
The overall background of the US economic experience around 1980 can actually be described in two words: stagflation.
It originated from the economic recession and uncontrolled inflation experienced by the United States after the outbreak of the second oil crisis. In this context, then Federal Reserve Chairman Volcker briefly cut interest rates in 1980, but this monetary easing action was quickly overturned just a few months later.
According to the NBER definition, the US economy entered a recession in the first quarter of 1980. The federal funds rate dropped from nearly 20% in March 1980 to 10% in July.
But surprisingly, the economy has shown a strong recovery. In October of that year, the Iran Iraq War broke out, global oil prices soared, and inflation risks once again emerged. Due to a strong rebound in economic activity and the threat posed by rising oil prices, the Federal Reserve quickly initiated a new round of tightening, with the federal funds rate rising from 13% in October of that year to 20% in December.
Interestingly, after the Federal Reserve cut interest rates at that time, investors represented by bond traders were also almost skeptical that the Fed's rate cuts could be sustained - the 10-year Treasury yield rose by about 200 basis points in the 100 days after the Fed's first rate cut. Even at that time, the more the Federal Reserve shouted the slogan of interest rate cuts, the more nervous the bond market became, and investors sold bonds one after another to prevent vicious inflation from happening.
This scenario, although not entirely in line with the current situation of the US Treasury market, actually has many similarities.
For example, concerns about inflation are actually consistent. Market participants expect that with the inauguration of US President elect Trump and his plans to cut taxes and impose tariffs on a range of imported products, US inflation will accelerate again. These measures may widen the fiscal deficit, put pressure on the long end of the yield curve, and push up long-term bond yields.
Some industry insiders are even beginning to predict that the Federal Reserve will "return to the path of interest rate hikes". For example, Torsten Sloan, Chief Economist of Apollo Global Management, recently warned that the Federal Reserve may have to return to the path of interest rate hikes in 2025, as the US economy remains strong and President elect Trump's planned policies could push up inflation.
Perhaps Powell may find that after leading the most aggressive tightening action by the Federal Reserve in 40 years, he also needs to flip through the "textbook" that records history from over 40 years ago on how to end this tightening cycle.