#BTC走势分析 Shenwan Hongyuan believes that the Fed's rate cut rhythm this year is: 25bp+25bp+25bp. Rate cut trading has been largely preempted, and there may be a rebound risk in the short term, but the reversal point may still need to be observed.
(I) Rate cuts and rate cut trading: Rate cut trading precedes the rate cut cycle, and the "reversal" of trading needs to focus on the Fed's policy stance
Reviewing the 13 interest rate cuts by the Federal Reserve since the 1970s, the 10-year US Treasury bond interest rate tends to decline. Before the rate cut, the downward slope of the US Treasury bond interest rate was larger, and after the rate cut, the downward slope slowed down. When the rate cut was implemented, the US Treasury bond interest rate may rebound in the short term due to the interference of trading factors such as the "preemptive run" of the rate cut transaction and the increase in short net positions, and the rebound of the long-term US Treasury bond interest rate may be greater.
After the rate cut is implemented, when the 10-year US Treasury bond interest rate will reverse depends on when the Fed's policy changes. In previous rate cut cycles, the "reversal" of the 10-year US Treasury bond interest rate often occurs before and after the last rate cut. It is worth emphasizing that this time, due to the large-scale preemption of rate cut transactions, it is necessary to pay attention to the "second-order derivative" of the rate cut, that is, the flattening of the rate cut slope.
(II) The pace of the Fed’s rate cuts: The pace of the Fed’s rate cuts depends on economic fundamentals and the flexibility of interest rate-sensitive sectors.
The way the economy "landed" determined the downward slope and space of the U.S. Treasury bond interest rate. In a recession, the Fed cut interest rates by a larger margin; after 1982, the Fed began to shift to a regulatory approach based mainly on the federal funds rate. In the seven subsequent interest rate cut cycles, the preventive interest rate cuts all fell back to near the neutral interest rate. In a recession, interest rates would "overshoot."
The direction of inflation is the main contradiction in the Fed's policy stance change. If the force driving the inflation rebound is temporary, then the rate cut trade is more likely to repeat rather than reverse. Generally speaking, if the inflation rebound is driven by the demand side, such as the labor market further tightening under a tight state, then the inflation rebound may be more persistent.
(III) The Fed’s room for rate cuts: Assuming that the core inflation rate in 2025 is 2.5%, the FFR rate may be around 4%.
Referring to the neutral interest rate framework, the FFR interest rate matching 2.5% inflation may be around 4%, which also means that the Fed’s room to cut interest rates is about 100-150bp. Our baseline assumption for the Fed's interest rate cut is 75bp+75bp. Among them, the first 75bp is this year, and the second 75bp is after 2025. The outcome of the US election may have a significant impact on the rhythm of the second 75bp.
In the short term, although the long-term US Treasury bond interest rate may rebound, it is still mainly about bottoming out and grinding. In the medium term, we still need to pay attention to the chain of "inflation stickiness-slowing down of interest rate cuts-reversal of long-term interest rates". As of the end of 2025, the short-term interest rate has been priced in a 230bp interest rate cut, and the 10-year US Treasury bond is priced at about 150bp. In the short term, there is a certain adjustment risk in the US Treasury curve, but it may be mainly at the short end.
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The Fed is about to cut interest rates. How much room is there for US Treasury bond interest rates to fall? We believe that the Fed's rate cut rhythm this year will be: 25bp+25bp+25bp. Rate cut transactions have been largely preempted, and there may be a risk of rebound in the short term, but the reversal point may still need to be observed.
Hot topic: With interest rate cuts approaching, can U.S. Treasury bond yields continue to decline?
(I) Rate cuts and rate cut trading: Rate cut trading precedes the rate cut cycle, and the "reversal" of trading needs to focus on the Fed's policy stance
During the Fed's interest rate cut cycle, the 10-year US Treasury bond interest rate tended to decline. Before the first interest rate cut, the downward slope of the US Treasury bond interest rate was larger, and after the interest rate cut, the slope slowed down. Reviewing the Fed's 13 interest rate cut cycles since the 1970s, 6 of them were interest rate cuts in a soft landing environment, with an average of 6 interest rate cuts of about 90BP; 7 interest rate cuts occurred during or after the economic recession, with an average of 15 interest rate cuts of about 633BP. Differentiating before, after, and after the interest rate cut, although the pace of interest rate changes is different during the entire interest rate cut cycle, the 10-year US Treasury bond interest rate tends to tend to decline.
When the first rate cut is implemented, the US Treasury bond interest rate may rebound in the short term. Three months before the first rate cut, the 10-year US Treasury bond interest rate dropped by an average of 62BP. About one month after the first rate cut, due to interference from transaction-level factors, the US Treasury bond interest rate often rebounded, with an average rebound of about 11BP. The interest rate rebound has little correlation with whether the economy is in recession. Taking the 1995 soft landing and the 2007 financial crisis as examples, the US Treasury bond interest rate may rebound before and after the first rate cut, and the long-term interest rate rebound is larger.
After the rate cut is implemented, when the US Treasury bond interest rate will reverse depends on when the Fed's policy changes. In previous rate cut cycles, the reversal of the 10-year US Treasury bond interest rate often occurs around the last rate cut, indicating that the Fed's policy direction plays a leading role. Taking the 2001 Internet bubble crisis as an example, the 10-year US Treasury bond interest rate stabilized around June 2003, the last rate cut. In the 1995 precautionary rate cut scenario, the 10-year US Treasury bond interest rate also rebounded around January 1996, when the last rate cut was implemented.
Even if the economy stabilizes, it does not completely equate to a shift in the Fed's policy. The lag in the Fed's policy is reflected in both the interest rate hike cycle and the interest rate cut cycle. There is a lag in the time it takes for the interest rate cut to take effect, and the length of the lag itself is difficult to predict. Powell believes in 2022 that the effects of monetary policy often lag 12-18 months before they are reflected. In the fourth quarter of 2001, the US GDP growth rate had bottomed out and rebounded, but it was not until mid-2003 that the Fed ended its interest rate cut cycle.
(II) The pace of the Fed’s rate cuts: The pace of the Fed’s rate cuts depends on economic fundamentals and the flexibility of interest rate-sensitive sectors.
The way the economy "landed" determines the downward slope and space of U.S. bond interest rates. In a recession, the Fed cuts interest rates more sharply; in a soft landing, the rate cuts are shallower. In a recession, the Fed cuts interest rates by an average of 633BP, and in a non-recessionary scenario, the average rate cut is 90BP. In early 1995, the U.S. economic growth began to slow down, and the market was worried that the economy might enter a recession. In order to achieve a "soft landing", the Fed took relatively mild interest rate cuts in 1995 and 1996, cutting interest rates by a total of 75 basis points, reducing interest rates from 6% to 5.25%.
If the pressure of inflation rebound is large, it will also restrict the depth of the Fed's interest rate cut. Based on the study of interest rate cut transactions under the background of soft landing in the 1960s and 1990s, it can be found that the time of inflation rebound may correspond to the repetition of interest rate cut transactions, and the persistence of inflation rebound corresponds to whether the interest rate cut is repeated or reversed. Furthermore, if the force driving the inflation rebound is temporary, then the interest rate cut transaction is more likely to be repeated rather than reversed. Generally speaking, if the inflation rebound is driven by the demand side, such as the labor market further tightening under a tight state, then the persistence of the inflation rebound may be higher.
Taking the neutral interest rate as an anchor, and considering the fundamentals and inflation factors uniformly, a small interest rate cut may not be able to ease the current degree of monetary tightening. As of the third quarter of 2024, the actual federal funds effective rate in the United States is about 2.4%, and the actual natural interest rate is about 0.7%, exceeding 170BP. The degree of tightening has reached the highest level in nearly 30 years. A small interest rate cut may not be able to ease the degree of monetary tightening, and the economy still has the risk of weakening. After 1982, the Federal Reserve began to turn to a regulatory tool based mainly on the federal funds rate. In the seven subsequent interest rate cut cycles, the preventive interest rate cuts all fell back to near the neutral interest rate. In the case of a recession, the reduction is even deeper.
(III) The Fed’s room for rate cuts: Assuming that the core inflation rate in 2025 is 2.5%, the FFR rate may be around 4%.
With the implementation of the interest rate cut, trading factors may cause the US Treasury bond interest rate to rebound in the short term. The pricing of this round of interest rate cut expectations is too aggressive. The current market expectation is a 125bp interest rate cut this year and a 125bp interest rate cut next year. The short-term "interest rate cut trading" implied by the futures market has exceeded the baseline scenario given by the June FOMC meeting (the median FFR is 5.1%, and the corresponding range is 5-5.25%, that is, one interest rate cut). Considering the fact that recent data has weakened and the change in the Fed's policy stance, the September meeting may further lower the interest rate cut curve through the economic forecast summary while confirming the interest rate cut. We believe that the market has over-traded the interest rate cut. Secondly, since August, the net short position of 10-year US Treasury bonds has increased. With the implementation of the interest rate cut, short selling factors may cause interest rates to rebound in the short term.
In the medium term, US bond interest rates may still tend to decline. The focus of the Fed's policy stance has shifted from "de-inflation" to "maximum employment". The upside risk of inflation has weakened, and the downside risk of employment is also increasing. In terms of inflation, unlike the "Great Stagflation" period in the 1970s, during this round of inflation, the medium- and long-term inflation expectations in the United States are still anchored at around 2.1% to 2.4%; in the medium term, the core service inflation in the United States is highly positively correlated with the wage growth rate. The labor market is gradually loosening. If there is no new exogenous shock, the risk of inflation rebound may be "temporary" in the future.
In terms of employment, the US labor market has basically completed the process of equilibrium and there is a risk of further "slack". On the one hand, the unemployment rate of 4.3% is already higher than the natural unemployment rate (4.1%); on the other hand, although the number of new non-agricultural jobs in recent months is roughly equivalent to the pre-epidemic average level (150,000-200,000 range). The unemployment rate rose to 4.3% in July. Although there are some temporary factors, the recent trend of the unemployment rate still indicates that the phenomenon of the unemployment rate being slightly higher than the natural unemployment rate (4.2%) may not be temporary.
Referring to the neutral interest rate framework, the FFR interest rate matching 2.5% inflation may be around 4%, which also means that the Fed’s room to cut interest rates is about 100-150bp. Our baseline assumption for the Fed's interest rate cut is 75bp+75bp. Among them, the first 75bp is this year, and the second 75bp is after 2025. The outcome of the US election may have a significant impact on the rhythm of the second 75bp.
In the short term, although the long-term US Treasury bond interest rate may rebound, it is still mainly bottoming out and grinding. In the medium term, we still need to pay attention to the chain of "inflation stickiness-slowing down of interest rate cuts-reversal of long-term interest rates". As of the end of 2025, the short-term interest rate has been priced in a 230bp interest rate cut, and the 10-year US Treasury bond is priced at about 150bp. In the short term, there is a certain adjustment risk in the US Treasury curve, but it may be mainly on the short end.
Risk Warning:
Geopolitical conflicts escalate; the Federal Reserve turns hawkish again; financial conditions shrink at an accelerated pace.