The U.S. Federal Reserve (Fed) is fueling excitement in the U.S. stock market with expectations that it will lower interest rates in September. Money has also flowed into other assets, such as virtual assets and gold. Despite being different types of assets, they have traced similar trajectories, leading to the term "synchronization of risk assets."
However, long-term U.S. Government Bonds sensitive to interest rates are not performing well. The 20-year and 30-year bonds have surpassed the 4.9% mark again. The widening gap between short-term and long-term bond yields is leading to a predominant outlook for a "steepening" yield curve. In particular, many believe that the long-term bond yields will continue to rise, resulting in a bear steepening rather than a bullish steepening that typically follows a decline in short-term rates.
The high yields on long-term U.S. Government Bonds are attributed to ongoing inflation concerns and the lack of demand for long-term Government Bonds compared to the past.
In this context, three events will impact the U.S. bond market this week. First, the minutes from the July Federal Open Market Committee (FOMC) meeting will be released on the 21st. Since there were minority opinions for interest rate cuts during this meeting, investors are paying close attention to the contents.
The Jackson Hole meeting will take place from the 21st to the 23rd. Held every August, the Jackson Hole meeting has been a venue to confirm the monetary policy direction set by Fed Chair Jerome Powell. It is expected that Powell will not provide clear signals for interest rate cuts as anticipated by the market.
Additionally, the bidding for 20-year U.S. Government Bonds and 30-year Treasury Inflation-Protected Securities will take place from the 21st to the 22nd. Considering that the previous long-term bonds did not attract strong demand despite poor employment indicators in July, it is likely that this time will not see strong demand either.
However, there are opinions that we need to prepare for when the yields on long-term U.S. Government Bonds decrease. Kang Hyun-ki, a researcher at DB Financial Investment, noted that "if the yields decline, the appeal of Government Bonds will be accentuated, and money that has flowed into risk assets may withdraw."
Kang evaluated that the recent decline in the leading economic index, potential slowdown in the labor market, the reduction in demand due to the tariff policies of the Trump administration, and downward pressure on prices suggest a trend similar to when the Federal Reserve shifted from high to low interest rates in the 1980s.
In simpler terms, it means that the flow of money that had shifted from the bond market to risk assets could change direction. Kang advised increasing the proportion of long-term Government Bonds and reducing the weight of risk assets such as stocks, Bitcoin, and gold.
It remains uncertain which outlook will prevail, but it is crucial to remember that the flow of money is always subject to change. The focus should be on "where the money will rush to" rather than "when the interest rates will drop."