What effect do interest rate cuts have on stock markets and bonds

Speaking Friday at the World Bank Annual Meeting in Jackson Hole, Wyoming, U.S. Federal Reserve Chairman Powell indicated it was time to adjust policy to boost employment markets, strongly hinting at starting rate cuts in September. THESE COMMENTS HAVE PROMPTED THE MARKET TO CONFIRM THAT THE US RATE CUT CYCLE IS LIKELY TO BE OFFICIALLY LAUNCHED ON 18 SEPTEMBER. IN VIEW OF RECENT PERFORMANCE OF INTEREST RATE FUTURES, PRICE IN IS EXPECTING A SIGNIFICANT CUT IN INTEREST RATES. This is in the last Hong Kong stock article”Following the pace of interest rate cuts, what are the high dividend stocks worth watching out for? ” There are also mentions.

Much to the surprise of the market, Powell's remarks were more aggressive than expected, not only did they not anticipate a rate cut (generally intended to control market sentiment), but literally meant that they did not rule out further rate cuts. Stimulated by the news, the three major U.S. stock indexes also gained significantly on Friday. $Dow Jones Industrial Average(.DJI.US)$ 、 $S&P 500 Index(.SPX.US)$ and $Nasdaq Composite Index(.IXIC.US)$ Also up more than 1%, the cryptocurrency rose significantly under the support of a weak US dollar. The following are the latest interest rate futures reflecting the market's view of future interest rates.

From the perspective of interest rate futures, the market expects the Fed to cut rates by 0.25cm to 5~5.25cm on September 18, but given the current Fed's extreme focus on the performance of the employment market, the performance of non-farm data at the beginning of September will be key. If unemployment continues to rise, the market will likely force the Fed to The yield will drop by 0.5 cm at a time. Therefore, the non-agricultural data released on September 6 will become more important.

Also worth noting is that two important messages can be seen from the table above.

1. The market now generally thinks that the Federal Reserve will cut interest rates by 1 percentage point or more this year

In interest rate futures, the market 100% believes that on December 18, 2024 (ie the end of this year) the rate will fall to 4.25~4.50 or lower, i.e. the rate will fall by more than 1 cm. Considering that the Fed has only 3 meetings left this year, that means there is an emergency rate cut of 0.25 cm in the middle or there will be a meeting A drop of 0.5 cm in one breath. This is in line with Powell's comments last week that saw economic data as the judge of interest rate cutting behavior.

2. There is considerable room for long-term interest rate decline

On CME's Fed watch, the latest forecast is on September 17, 2025, that the next year will see a rate cut 8 times (0.25 cm each) or 2 percentage points, which will result in the rate falling to a level of 3.25 to 3.5 cm. Although the recent 10-year debt has fallen back to 3.8pc, a decline in the neutral rate will be a major trend if the longer-term rate downside is confirmed without excluding the risk free rate. As debt prices continue to rise, it is important to keep an eye on whether US stocks and US bonds can rise at the same time will be the focus of investment.

The focus of September 18 is more than just interest rate cuts

From the above logic, when it comes to investing in bonds, we are not simply looking at whether or not there will be a cut in interest rates on September 18. But this day will be very important because the Fed publishes bitmaps every three months, and it is expected that bitmaps will change significantly in September.

(Source: CME, June Bitmap)

The above is a Fed official bitmap from June, and from the latest interest rate futures also shows that the Fed's June view was completely wrong, and how future officials will adjust their thinking will be a key factor. Individuals are more concerned about the opinion of the 2026 interest rate and the long-term rate. From an economic point of view, the US economy currently faces a risk of overheating (not a hard landing), with little chance of a long-term rate change. Instead, rates in 2026 will be crucial because whether or not to push rates back to longer-term rates in 2026 will be key.

The impact of interest rate reductions on bonds, how to invest in bonds

With the market recently confirming the coming of a cycle of interest rate cuts, many are wondering what the potential returns are for investing in bonds? This time it will be more crude and simple to understand this. First of all, the important thing is that it is market interest rates that affect the price of bonds, not the Fed controls the Italian rate (the rate cut on September 18 is called the interest rate). For example, the US 10-year debt yield, commonly known as the risk-free rate, has recently fallen sharply from a high of 5pc to below 3.8pc, reflecting the market's expected rate cut deployment. So, the September rate cut was not the main factor controlling prices, but rather the market expected.

Frequently mentioned by writers over the past year $iShares 20+ Year Treasury Bond ETF(TLT.US)$ As an example, TLT is an investment in a series of US bonds with a period of more than 20 years, because long-term bonds have a longer duration, which means they are also relatively sensitive to interest rates. The US 10-year debt fell from 5.02pc to 3.67pc from the previous year, and TLT's price also rose from $79.75 to a high of $99.935 to reach 25.3%.

From the above historical data, in line with the assumption of a straight-line relationship between the rates and prices mentioned in the duration model, if the long-term neutral rate will fall back to the level of 2.5 cm, that is, assuming the risk-free rate is expected to fall to 2.5 cm in the long term. The current rate is expected to fall back to 1.3 cm, representing the return on investment of long-term bonds such as TLT It will reach about 25%. But keep in mind that based on the most recent bitmap above assumptions, it may take until the end of 2026 or longer for interest rates to fall to this level, so over this 2.5 years, the annual composite return on TLT is about 9%.

Of course, the above assumption is that no one knows what will happen in the next 2.5 yearsHowever, as interest rate risks for bonds are almost eliminated, the only thing worth paying attention to is the risk of default in the United States in the two and a half years, which will be the main risk factor for investing in long-term debt.

Assuming that investors are not concerned about the above risks, one would conclude that investments in current debt are relatively safe and produce decent reasonable returns, and that short-term returns are more attractive than those sought on regular deposits.

If you go a little further, you can also add stable returns with some options strategies Covercall.

Finally, some investors may consider investing directly in US Treasury bonds rather than ETFs as an option, which I would not recommend. Mainly considering that our investment in US long debt is simply to earn CFDs and not really intend to be an exaggerated long-term investment, the benefit of investing directly in ETFs will be lower liquidity risk, i.e. less risk of buying CFDs when selling.

• Role of Asset Allocation

  In addition to the space for returns, it is very important to know the role positioning of bonds. Although US bonds are already relatively safe assets, the risk-free rates mentioned above are not entirely risk-free, which is just an academic term. However, we need to understand the reason behind this rate cut, as the rate cut is expected to prevent a recession, so bond investments are also prepared to prevent a recession in the United States. So the approach to asset allocation is largely to look at how to judge the US economy, in conclusion without leaving two assumptions: economic hard landing and economic soft landing.

• Assume that the economy is hard on the ground

  If there is a hard landing in the economy, the unemployment rate continues to soar and there are clear signs of a shift in the economy. The Fed's bitmap assumption becomes meaningless when the risk of default in the United States should be concerned. But in the absence of a clear debt default issue, the Fed is likely to cut interest rates more aggressively, and bond returns in time may be even more optimistic than expected.

  So bond defensiveness is very important and essential in the current asset allocation.

• Assume economic soft landing

  There is currently a strong chance of a soft landing in Fed officials and mainstream markets, indicating that the economy will slow, but unemployment and economic momentum will not be completely discolored. Under this assumption, while bonds have a high chance of achieving expected returns, some assets with strong fundamentals or assets in a low-yield environment, such as tech stocks or gold, could benefit from potential returns. In this case, investing in opinion bonds is only a defensive option, and half invested in bonds and half invested in stocks may be a more stable combination.

HOW TO INVEST IN U.S. STOCKS

According to the authors, investing directly in US equities would be a more stable option. $NVIDIA(NVDA.US)$ $Apple(AAPL.US)$ $Microsoft(MSFT.US)$ $Alphabet-C(GOOG.US)$ $Amazon(AMZN.US)$ $Meta Platforms(META.US)$ $Tesla(TSLA.US)$ 。 If you find it difficult to choose in Chao Hsiung, you can pay attention to related ETFs such as $Roundhill Magnificent Seven ETF(MAGS.US)$ 。

Of course, in addition to the Seven Kings, there are $Netflix(NFLX.US)$ The stability of these businesses is also worth noting. Therefore, in addition to the aforementioned direct investment in related ETFs, another more suitable option is to invest in index ETFs that track the major markets, such as those that track the S&P 500 index, such as $SPDR S&P 500 ETF(SPY.US)$ either $Vanguard S&P 500 ETF(VOO.US)$ 。

Also, keep in mind that the path of interest rate falls is not smooth after all, mid-way Fed statements or economic data can distort market thinking. If you are confident in your technical analysis and market perception, you can use a consistently leveraged ETF such as $ProShares UltraPro QQQ ETF(TQQQ.US)$ either $ProShares UltraPro Short QQQ ETF(SQQQ.US)$ Do short-line deployments.

Chief Analyst of Futu Securities Liang

(The author is a license holder of the Securities Regulatory Commission, and its contacts do not have financial interests in the issuer of the proposed shares mentioned above)