Hi YXI friends,

We are going to make this a weekly update covering bonds and equity indices, specifically, TLT, SPY, QQQ, IWM. Future updates will also feature XLK and XLF.

The first section around bonds is a very detailed walkthrough on how one should approach interest rate markets, from the short end to the long end. This helps us understand the key building blocks in what drives bond yields and therefore TLT.

In the second section, I have put together my near-term outlooks for SPY, QQQ, IWM based on their valuation, historical performance, and price technicals.

Let’s dive in!

Table of Contents

• 1. Rates: TLT

  • FOMC Decisions

  • US Treasury Bond Yields

  • TLT Price Analysis

• 2. S&P 500: SPY

• 3. Nasdaq 100: QQQ

• 4. Russell 2000: IWM

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Rates: TLT

FOMC Decisions

We start our interest rate update with the Fed Funds yields in the short end. Using the Fed Funds futures market, we have a good idea of what the market thinks the Fed will do in each meeting.

Market Projections Of FOMC Decisions

The market currently expects two cuts for 2025 still, something that hasn’t changed a lot since the January FOMC.

The market assigns no more than a 10bp cut for each meeting, meaning they are not actually that sure of the exact timing of upcoming cuts. This is because the Fed is in a watch-and-see mode, with their decisions heavily influenced by the actual economic data (specifically the CPI and PCE)

SOFR 3-month Interest Rate Futures

The yield curve “normalises” after September 2026, meaning yields are higher further out. This implies the market expect the Fed to raise interest rates either due to economic strength (a very tight labour market) or higher inflation.

US Treasury Bond Yields

The 10-year yield is now 4.52% and the 30-year yield 4.75% They reflect not just the expected interest rate levels in the future, but also the compensation investors require for holding long duration bonds (aka. “term premium”).

Treasury Term Premia

Term premium has risen significantly since September, when Trump’s odds of winning the Election started to rise. This is because the market assigns higher Treasury supply risk (i.e. the government issues more bonds and flood the market) as Trump’s tax cut proposals worsen the US national deficit.

Inflation Expectations, Oil, Yields

Finally, the 10-year yield is shaped by the inflation expectations, as rising inflation expectations drive nominal yields higher.

Short-end inflation expectations are driven by tariff concerns, as Trump is adamant in starting a “Trade Total War” (I proudly coined this phrase myself, after playing too much Rome Total War as a kid).

5-Year Inflation Expectation

The 5-Year inflation expectation is now nearing a 2-year high at 2.6%. Why is this important? The last time it reached this level, we were in the middle of a hiking cycle!

Luckily, the recent pullback in oil has helped contain the 10-year yield, although I am not sure for how long, as the optimism around the end of Russia-Ukraine war wears out. The failure in ending the war quickly has a negative impact on the oil supply from Russia due to US sanctions, which can squeeze oil prices higher near term.

TLT Price Analysis

It may feels quite long winded how we get here, but I assure you all of the above are key building blocks to understanding interest rate moves, which underpin how the rest of financial markets perform. These relationships are fully explained in my articles across equities, gold, Bitcoin, BDCs, and China.

TLT Daily (https://www.tradingview.com/x/LgR011sA/)

While I had been optimistic about TLT’s putting in a bottom in January, the price action has left me wanting. So far, we have just seen 3 waves off the January low, as the hot CPI data last week derailed the bullish move.

The risk now weighs more towards the downside. I am at least not rushed to buy here as a short term trade.

However, as I will explain more in the “SPY” section, buying bonds for the long term may be a good hedge against a potential market crash.

This is because at 4.5-4.7% yields for 10-30 year bonds, investors are still getting real returns above the inflation expectation of 2.4%. And this is not a bad deal at all if equities fail reach 5% annual returns in the next 10 years.

2. S&P 500: SPY

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