Discretionary: Behind System Signals -> Yields/Bonds...Fed update & the Trade
Bonus Content
Bond Market / Yield Curve & Fed Update — > Plus the Trade:
The bond system flipped long on 4/29 under the Other System Signals.
But here’s what I said at the time:
”I will not be taking that signal today in Bonds…I will look for bounces in yields, buyable pull-backs in price to potentially trade the long side of bonds…basically I don’t like the risk to reward on this signal on a discretionary basis.”
Yield Curve Context:
Interesting action on the curve lately:
The long end (30’s) continues to lag — likely reflecting:
Elevated risk premium
Relentless fiscal deficits (yes, even with Doge memes flying)
A ballooning $36T+ national debt
And over $1.2 trillion in annual net interest just to service it
Meanwhile, parts of the economy are flashing slowdown signals, and the front end of the curve is pricing in Fed rate cuts.
In the chart below:
Fed Funds Rate (yellow) sits at an effective 4.33%
The 2-year yield has drifted down to 3.83% - look where it started the year (blue)!
Translation:
Markets are implying the Fed would need to cut twice just to catch up with what the 2-year is already pricing in.
Now Take a Look at the Long End of the Curve…
If you shift your eyes to the long end of the chart above (30-year yields), you’ll notice something telling:
From 12/31/2024 to 5/2/2025 — year-to-date — yields haven’t budged.
We’re still sitting right around 4.79%, even 4.83% as I type this.
Translation?
Money isn’t rushing into the long end.
Not even close.
Instead, it’s pouring into the front end of the curve — 2s through 5s.
Why?
Growth is slowing
Inflation has come down
And frankly, lending to the U.S. Treasury for 2–3 years doesn’t feel like “long duration” risk in this environment.
Now, Remember the “Inverted” Curve?
You probably recall the inverted yield curve headlines from 2023–2024.
Let’s look at the 10s–2s spread (10-year yields minus 2-year yields), shown in the chart below.
Since bottoming around –50 bps last June, the curve has steepened dramatically — now approaching +0.60%.
The driver?
It’s not that 10-year yields surged —
It’s that 2-year yields have plunged.
Since June:
2-year yields are down ~90 bps
10-year yields? Barely moved — just a few basis points higher
—> And that’s what created nearly +100 bps of steepening, as shown below.
Fed Update
The current Fed Funds Rate stands at 4.25% – 4.50%.
For this Wednesday’s meeting, the market is only pricing in a 2% chance of a hike — effectively off the table for now.
Inflation Cooling (But Not "There" Yet)
Core PCE (YoY) has slowed to 2.64% as of March — still well above the Fed’s 2% target, but easing off the recent high of 2.96% in February.
Based on incoming data, the upcoming CPI print on 5/13 could come in as low as 2.3%-ish — a notable drop.
What the Market Expects Going Forward
After the May FOMC meeting, markets are pricing in a 95% chance of one rate cut by the July 30 meeting.
For the full year, the market expects three cuts total.
What Powell Likely Says
I expect Powell to continue emphasizing:
The need for patience
Focus on both sides of the mandate, including labor data
lower growth outloook? based on new GDP soft print…likely
No urgency to cut yet
That messaging — coupled with sticky inflation — likely explains why 10-year yields have quietly risen +30 bps recently off the early April lows.
So… What’s the Trade?
I don’t have a strong directional call on the long bond right now — it could absolutely continue to weaken (i.e., bond prices down, yields up) for all the macro reasons we just walked through.