The Fed's rate cut expectations are at a peak, triggering a comprehensive rebound in the bond market

At the beginning of this year, investors who bet on the Fed rate cut and went long on bonds experienced disappointment time and time again. As we enter the second half of the year, with the Fed rate cut approaching, a comprehensive rebound in the bond market has been initiated. The yield on the 10-year U.S. Treasury bond has been declining since the end of April, from around 4.65%, and the rally in U.S. bonds has intensified since August, with the yield falling below 4% and currently hovering around 3.8%. This rebound is not limited to U.S. Treasuries, as U.S. corporate bonds, both investment-grade and junk bonds, are also rebounding. Since May, Vanguard's Vanguard Total Bond Market Index Fund ETF (BND) has been in a steady uptrend, with the 50-day moving average consistently well above the 200-day moving average, indicating a strong upward trend. BND is one of the largest bond ETFs in the U.S., tracking the Bloomberg Aggregate Bond Index (AGG). The AGG consists of over 13,000 securities, weighted by market value, covering mainly U.S. government bonds, corporate bonds, mortgage-backed securities (MBS), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS), but excluding Treasury Inflation-Protected Securities (TIPS). The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) under BlackRock hit a nearly two-year high, rising over 3% in the past month. LQD is the oldest investment-grade corporate bond ETF in the U.S., with a mix of maturities spanning short, medium, and long term, with the highest proportion being corporate bonds over 20 years, followed by 3-5 years and 7-10 years. In terms of industry holdings, banks have the largest proportion, followed by non-cyclical consumer goods, communication, and technology. The junk bond ETF, SPDR Bloomberg High Yield Bond ETF (JNK), has continued its rally since the end of 2023 and has recently accelerated its upward trend Two factors that may disrupt the upward trend in the bond market are the resurgence of inflation and stronger-than-expected economic growth. However, based on the data released so far, both scenarios appear to be low-probability events. This Friday, Powell's speech at Jackson Hole is expected to further boost the bond market rebound once a dovish rate cut signal is released