US Treasury Bonds, Flash Crash!

Questioning AI · What signals are hidden behind the bottom-raising trend amid fluctuations in U.S. Treasuries?

Keynes once said, “The market can remain irrational longer than you can remain solvent.”

The U.S. bond market, which was doing well, was suddenly interrupted by the Middle East situation.

Many new investors find it hard to accept,

Even though the trend of rate cuts is certain, why does the market always move in the opposite direction?

But if you’ve been in the market for a few years,

You’ll find that this kind of thing is really very normal.

In fact, it can be said that this is the normal state of the market.

If we extend the timeline long enough, we’ll see something particularly interesting.

The market is never just simple up and down, not just a straightforward trend,

But a repeated rollercoaster, with lots of noise within the trend.

For example,

In April 2024, inflation remains sticky, rate cut expectations are weaker than expected, causing a sharp decline.

Market sentiment is very pessimistic.

By September 2024, after revisions to U.S. employment data, the figures fall short of expectations, triggering recession, rate cuts, and a surge in U.S. Treasuries.

Market sentiment turns optimistic again.

In January 2025, long-term and short-term bonds switch from inversion to normal, but the gains are much lower than those of short-term bonds.

This time, the long-term bond market is mainly hurt, and investors are furious.

In April 2025, U.S. Treasuries initially rose due to a sharp drop in U.S. stocks, as funds sought safety.

Investors were very excited.

But within just a few days, the market reversed,

Claiming China was massively selling U.S. Treasuries, that a collapse was imminent, and that payments could not be made. U.S. Treasuries plummeted again.

Market sentiment collapsed instantly.

In January 2026, consensus expectations predicted the Federal Reserve would cut rates in June,

Leading to a rally in U.S. Treasuries, preparing to break out of a price range that had been suppressed for 3-4 years.

Everyone was looking forward to it.

But then, another reversal happened.

The Middle East situation rapidly escalated, causing oil prices to jump, and inflation expectations to rise quickly again.

Market expectations for rate cuts may be delayed, or even turn into rate hikes.

U.S. Treasuries fell accordingly.

Over the past 3-4 years, U.S. Treasuries have been repeatedly fluctuating,

But the overall bottom has been gradually rising.

As shown in the chart, the U.S. 10-year Treasury futures price rose from a low of 105.3 in October 2023 to 107 in January 2025, and now hovers around 110.5.

Just looking at the U.S. bond market, it seems to be trading inflation expectations.

But U.S. Treasuries are only one part of a diversified asset allocation.

If you look at stocks, bonds, the dollar, commodities, and other assets together,

It becomes easier to see the flow of funds across the entire market, revealing a different market picture.

Let’s take the current market as an example, to see what expectations are being traded.

The stock market, especially the mainstream markets, is not much affected, seemingly trading “economic expectations that are not so pessimistic.”

U.S. stocks have pulled back, but not much;

Japan and South Korea have recovered most of their losses after corrections;

China’s correction is also modest, holding the line above and below.

What does this indicate?

It shows that top-tier funds have relatively optimistic expectations for the market, at least for now, there’s no large-scale panic.

In summary, the economy may face pressure, but it’s not collapsing.

The bond market appears to be trading “inflation plus stagflation.”

U.S. Treasuries have pulled back, with yields rising.

The underlying logic is clear: the market believes oil prices are high, inflation is high, and rate cuts are unlikely.

This indicates that U.S. Treasuries are currently trading at a pace of rate cuts that’s slower than expected, causing prices to fall.

Meanwhile, the commodity market is quite pessimistic, showing signs of “demand collapse.”

Except for crude oil, gold, copper, aluminum, and other commodities are all in correction.

The signals reflected in market prices here are completely different from stocks and bonds!

Demand is weak, inventories are high, and the economy may be heading toward recession.

Three markets, three completely opposite worlds.

But when compared together, a very interesting phenomenon emerges:

Stocks are trading as if the economy isn’t so bad.

Bonds are trading inflation and stagflation.

Commodities are trading recession.

This isn’t a contradiction. It’s saying that the market’s future is highly uncertain, with significant divergence!

Returning to the core question, U.S. Treasuries, like U.S. stocks and government bonds,

are all key components in the global top-tier capital allocation.

What should we do next?

We can’t predict the future, because no one can get it right.

If someone claims to know the future, then the entire world’s wealth would be theirs.

However, we can still make two probabilistic judgments.

First, the current yield is, rationally speaking, attractive.

The 10-year U.S. Treasury yield is around 4.3%, while the Federal Reserve’s benchmark rate is about 3.5%–3.75%.

What does this mean?

U.S. Treasuries (medium to long-term) already offer a premium over the benchmark rate.

If the market begins to trade “recessionary rate cuts,” similar to 2008 or 2020, yields could fall rapidly.

Even if the 10-year yield drops from 4.2% to 3.5% or 3.2%,

the corresponding price increase could be in the 118–120 range.

Meanwhile, domestic 10-year government bond yields are below 2%.

In other words, U.S. Treasuries are undervalued at this moment, with interest support underneath and expectations of flexibility above.

Second, what about the probability of large, aggressive rate hikes?

A basic principle is: under what conditions would there be a big rate hike?

When the economy overheats,

such as when hot money flows in heavily, like when the U.S. loosens monetary policy, and companies and consumers have plenty of money to spend.

When capital outflows occur,

such as during economic downturns, with poor exchange rates, and capital fleeing, like in Turkey or Argentina.

But in the current U.S. situation, neither of these conditions seem to exist.

Oil prices are high, inflation is high, but it only makes consumers less able to spend,

because they don’t have the big cash reserves like in 2020.

Ultimately, the U.S. economy is highly segmented.

So, the probability of a sudden, large rate hike is low.

To put it simply: even if the U.S. does raise rates for various reasons,

many people’s biggest fear is this scenario.

But it’s actually simple: accept it.

Because a rate hike also means higher interest income.

Old bonds’ prices may adjust, but time will heal all wounds.

Don’t forget, bonds have a key attribute: time is their best friend.

As long as there’s no default, price fluctuations will ultimately be smoothed out by interest.

Of course, no one knows exactly which script the market will follow, and even if they do, it may not go according to your rhythm.

But in the long run, it will reward “disciplined and patient” investors.

So, this recent dip in U.S. Treasuries is a good opportunity for dividend reinvestment.

Reinvest the dividends into more bonds.

Stay calm, don’t predict, don’t be emotional.

Because the logic is simple:

If a recession comes, rates will fall sharply, and prices will rise.

If there’s no recession, rates will gradually fall, and you’ll earn interest.

If inflation surges, use time to buy space, and earn interest while waiting for a correction.

The real big opportunity is in the future, when all assets fall together during a “big clearing.”

At that moment, bonds will be your most important “ammunition,” your greatest capital for greed when others panic!

Markets are always swinging.

Today trading inflation, tomorrow trading recession, the day after trading rate cuts.

But what truly matters is never what the market is thinking.

It’s about learning to use certainty to counter uncertainty.

★ Disclaimer: The above reflects only the author’s personal views and is for reference, learning, and communication purposes only.

Source: Mikuang Investment (ID: mikuangtouzi)