The Federal Reserve unexpectedly maintains a hawkish stance, predicting only one rate cut in 2024, reaffirming the long-term upward trend of interest rates. Despite the unexpected stance, US bond yields have significantly risen, and the market's expectation of a 50 basis point rate cut within the year has been fully reflected in the dot matrix, limiting the opportunity for a significant reduction in interest rates. Currently, the interest rate spread of investment grade bonds in developed markets is approaching decades low, with limited marginal adjustment space. With the US presidential election becoming the focus of the market, the outlook is even more uncertain.

Given the potential for foreign exchange spreads, increase holdings of investment grade bonds from developed markets. However, given the frequent fluctuations in interest rates, it is recommended that investors adopt a cautious screening strategy, maintain a defensive stance, focus on short-term bonds, and wait for better opportunities in the long-term market.

Recently, unexpectedly weak inflation data has led to a significant drop in US Treasury yields, with 2-year and 10-year yields falling by 12 and 23 basis points respectively. The latest economic forecast from the Federal Reserve shows that although the anti inflation process has been delayed, it is still ongoing, and the schedule for interest rate cuts has been postponed but the total number of cuts remains unchanged, confirming the view that interest rates will rise in the long term.

The sharp drop in US bond yields has dragged down the comprehensive yield of investment grade bonds in developed markets to 5.47%, and the interest rate spread continues to tighten, approaching historical highs. Although the valuation of corporate bonds is relatively high by historical standards, the bank believes that it is still in line with fundamentals, with limited room for short-term margin compression. Given that interest rate factors account for up to 80% of the comprehensive yield, short-term performance may be dominated by interest rate fluctuations.

The weak macroeconomic data and inflation data are in line with expectations, supporting the expectation of a soft landing for the US economy and creating conditions for the Federal Reserve to cut interest rates twice this year. The first rate cut may be implemented at the September meeting. The interest rate cut reflected by the futures market is slightly higher than the dot matrix, but close to our bank's forecast. In the future, unless inflation data significantly improves or the labor market significantly deteriorates, interest rates will be difficult to climb further. Meanwhile, as the US presidential debate approaches, uncertainty in fiscal, trade, and immigration policies may push up US bond yields and exacerbate market volatility. Therefore, investors should carefully select investment products, enhance the defensive nature of fixed income portfolios, and use short-term bonds to resist interest rate volatility risks.