What You’ll Find Here:
- Deconstructing nominal rates into their components to master bond market analysis.
- Goal: Identify what’s already priced in vs. overlooked by the market.
- The interplay between real rates and economic growth.
Macro Explorer View:
- Macroeconomic imbalances under our lens.
- Why the next Fed meeting is already priced in.
- Credit card debt markets and delinquency variations across bank types.
- 5 publicly traded banks with credit-card-centric business models.
- A chart under scrutiny (highlights volume/price anomalies).
Frontline Work:
- Live analysis of these banks’ price action, options flow, volume trends, and open interest.
We break down nominal rates to decode the bond market’s message
For a day, swing or holder trader, the first question when trading is:
What information has the market already priced in?
This pricing-in dynamic explains why sometimes you get good news and prices drop—or the opposite.
Reading the bond market is one way to understand this.
Of course, understanding the bond market means interpreting the distinct signals coming from each segment of the yield curve. The 2-year, 10-year, and 30-year yields each reflect different time horizons and expectations. As we’ve already seen, they behave like entirely different beasts.
Reading the bond market: The short term
Key points to highlight:
• A 38-year trend broke the same month the first rate hike of this cycle occurred.
• The last hike was in July 2023.
• Yields peaked in October 2023 (as we’ve already covered).
• Since then, we’ve seen a period of sideways movement, with a downside bias.
Reading the bond Market: Period A
This is the period that matters to us—because it marks the start of this cycle. To read bonds effectively, it’s always important to go back to the fundamentals.
A quick refresher for new members of this trading community.
Nominal Rate(n) = Real Rate(n) + Expected Inflation(n) + Term Premium(n)
Ask yourself: which variable is changing?
Reading the bond Market: A zoom into period A
Reading the bond market: 2-Year Nominal Yield
Key points:
- Nominal Rates It breaks out of a downward channel at the same time as the first rate hike.
- In July 2022, we get the last rate hike—also the moment when the inverted yield curve appears.
- Nominal rates peak in October 2023.
Reading the bond market: 2-Year Real Yield
Inflation expectations and the term premium are estimated from market data in various ways. The nominal rate, on the other hand, is public information. By isolating the variables, we get the real rate.
Looking at the real rate, the message is clear: the trend is clearly downward, and once again, the fluctuations in the nominal rate reflect changes in inflation expectations and the term premium.
Reading the bond market: Real Rates, Market Expectations, and Economic Growth
A decline in the real rate suggests that the market is anticipating a slowdown in economic activity. While the nominal rate appears to be moving sideways, a closer look reveals that the bond market is already pricing in short-term deceleration.
Reading the Bond Market: The Mid-Term Outlook
Key Points
- A 38-year trend broke the very month this rate hike cycle began.
- The last rate hike occurred in July 2023.
- Yields peaked in October 2023 (as we’ve already discussed).
- Since then, rates have been moving sideways.
The period that truly matters A, marks the beginning of the current cycle.
Reading the bond Market: Period A
The 10-year nominal yield peaked in October 2023—just like the rest of the curve. Since then, it’s been moving sideways with ups and downs.
Reading the bond market in real terms
When we shift to real terms, the post-October sideways movement actually reveals a clear downtrend.
The ups and downs in the nominal yield are driven by shifts in inflation expectations and the term premium. These factors matter—but they’re not the focus of today’s analysis, especially as they’re working against a falling real rate.
Reading the bond market: Nominal vs Real Yields
Let’s go back to the macro identity again:
Nominal Rate(n) = Real Rate(n) + Expected Inflation(n) + Term Premium(n)
Both nominal yields are being influenced by inflation expectations, the term premium, or a combination of both.There are countless reasons why this is happening—but that’s not our focus today.
What we’re looking for is the message from the bond market—and it’s clear:
It’s pricing in a sharp short-term slowdown, with a milder one in the medium term.
The message is sent through real yields.
Reading the bond market: Real rates, market expectations, and economic growth
A decline in the real rate suggests the market is anticipating an economic slowdown. While the nominal rate appears to be moving sideways, breaking it down reveals that the bond market is clearly pricing in short-term deceleration.
Comparing the rate of change between the 2-year and 10-year real yields shows that the short end is sending a much clearer message, especially when considering the implications of an inverted yield curve. This alone opens up trading opportunities across all things related to portfolio duration.
Reading the bond market: A key point
One possible scenario is a drop in real rates while nominal rates rise. Naturally, this would further reinforce the slowdown narrative. However, if that happens, the short end of the curve is safer than the long end—where both the term premium and inflation expectations could rise much more sharply.
Reading the bond market: Is its message already priced in?
The market is just 7% below its all-time high. Do you really think it has priced in what’s coming?
That’s all for today. See you next time!
P.S.
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See you there,
Martin
Inter Market Flow