The outbreak of the U.S.-Iran war dampened optimistic expectations in the bond market, and new Fed Chairman Hua Xu adopted vague policies, leading to increased volatility in U.S. debt.

Back in January this year, the overseas bond market was in high spirits and the Federal Reserve (Fed) entered a cycle of interest rate cuts. The bond market was planning to follow past market rules and make 2026 a fruitful year for bond trading. However, the U.S.-Iran war broke out without warning at the end of February, causing a rise in oil prices and a resurgence of inflation. Like a black swan spreading its wings, the Fed's possible interest rate cuts and the prosperity of the bond market were wiped out. Washer, the new Fed chairman who took office in May, has changed the open and transparent practice of previous chairmen and adjusted the Fed's future policy direction to be vague and difficult to predict.

Continuing the trend of interest rate cuts by the Federal Reserve, U.S. bond yields have fallen, bond prices have risen strongly, and the market is optimistic about the trading results in 2026. (Reuters)

From Greenspan to Ball, Fed decision-making moves toward openness and transparency

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Since Greenspan first proactively issued a policy statement after the Federal Open Market Committee (FOMC) meeting in 1994, the Fed's decision-making process has become increasingly open and transparent. In 2007, Bernanke introduced the "Economic Forecast Summary" published quarterly for the first time to strengthen communication with the public. In April 2011, Bernanke set a new precedent by holding a post-meeting press conference for the first time after the FOMC meeting. The chairman personally faced questions from the media. In 2012, for the first time, he included a "dot plot" to predict the direction of interest rates. In December 2018, Powell changed the press conference originally held once a quarter to eight FOMC meetings a year, pushing the Fed's policy transparency to an unprecedented peak. Over the past 30 years, successive Fed presidents have been committed to improving the public transparency of Fed policies, mainly to establish the credibility of the Fed and to allow the market to proactively move in the direction guided by the Fed on the basis of rational expectations, making the Fed's policies more effective.

Fed deletes guidance, withdraws dot plot, U.S. bond market plunges into blind man feeling

In the past, in order to study the direction of the Fed's future monetary policy, bond traders always carefully read the post-meeting statement, forward guidance and dot plots after each FOMC meeting, and used the large amount of information provided by the Fed to estimate possible future market dynamics. However, as Washer officially took office on May 22, 2026, the Fed's monetary policy communication once again returned to the simulated dilemma of the last century. Washer first significantly trimmed his first FOMC post-meeting statement after taking office, deleting forward guidance and refusing to submit dot plot forecasts himself. The relatively incomplete information caused the bond market to fall into the dilemma of blind people and the elephant, and also significantly amplified the volatility of the U.S. bond market. After two FOMC meetings in June and July without raising interest rates, the September FOMC meeting became Washu's most eye-catching FOMC meeting. In the absence of sufficient information for several months, Washer's decision at the September FOMC meeting will be judged by the market to continue President Trump's will and strive to maintain a low interest rate environment in the United States, as in the early days of taking office. Or will he comply with market expectations and start a new round of interest rate hikes by the Fed amid rising prices and inflationary concerns? This will not only affect the current bond market, but will also determine the pattern of the future financial environment.

Fed raises interest rates by 1 point, ending cycle of rate cuts

The results of the September FOMC meeting were released in the early morning of September 17, Taiwan time. In the end, Washu followed market expectations and led the Fed to make a decision to raise interest rates by 1 point. This is the first time the Fed has raised interest rates in the past three years. It also brings an end to the interest rate cuts in the past two years and has once again started a cycle of interest rate hikes and interest rate cuts. Through this interest rate hike, we can roughly outline the general direction of the Fed's monetary policy in the future under the leadership of this new chairman. First of all, although Washer tried his best to avoid letting the outside world know the Fed's possible policy direction by reducing the release of information, when the market had already formed a strong consensus on the Fed, Washer still did not make a reverse decision that was completely contrary to the market perception. Secondly, the FOMC is, after all, a majority meeting. Even if the chairman has specific ideas, he must still respect the opinions of the majority of members. Therefore, even though this year we have welcomed the most maverick chairman of the Fed in the past 30 years, compared with the past, the direction of the Fed's future policy may be slightly different in terms of the timing of raising and lowering interest rates, but the overall policy direction should be roughly the same as market expectations.

Will we raise interest rates by another 2 percent by the end of the year? There are still many variables in the long-term direction of interest rates

Therefore, after the FOMC meeting in September, we can first predict the visibility of U.S. monetary policy until the end of the year. After raising interest rates by one point at this meeting, although Washu still refused to submit his personal opinions on the dot plot and did not commit to subsequent policy directions, all 18 FOMC members, excluding the chairman, expressed their willingness to raise interest rates on the dot plot. Among them, 12 expect a two-point rate increase by the end of this year, four expect a three-point increase, and two expect a one-point increase. Judging from the majority of people in favor of a two-point increase, in the remaining two FOMC meetings in October and December this year, we may see a one-point increase in interest rates at each meeting. As for the dot plot, it also reveals that after raising interest rates in 2026, the Fed will remain on hold in 2027 and will cut interest rates again in 2028. Since there are still many variables, the decision must be made based on the changes in the U.S.-Iran war, raw material prices, U.S. prices and economic growth before the end of the year. It still takes time to further observe, and such optimistic conclusions cannot be made immediately.

With the Fed’s intensive interest rate hikes coming, it’s better to be conservative on overseas bonds

Therefore, under our expectations for the Fed's monetary policy before the end of the year led by Washer, how should the investment strategy of overseas bond commodities be formulated? First of all, we believe that investment in overseas bond commodities should be conservative before the end of the year. The next three months should be a period of intensive interest rate hikes by the Fed, and there are still upward risks in U.S. bond yields. This is the time to test the market's health with negative effects. If U.S. bond yields continue to fall during the process of raising interest rates before the end of the year, it indicates that the bottom of the bond market has not yet been reached, and we must continue to wait and see. If interest rates do not rebound in the process of raising interest rates, it means that the bond market may be close to the short satisfaction point. If the U.S. political and economic situation at the end of the year also supports the Fed's policy of not raising interest rates next year, it will be a rare entry point for overseas bonds.

In addition, after the Fed raised interest rates in September, the yield on U.S. government bonds with a maturity of more than 10 years has now reached more than 5%, almost the highest point in the past 20 years, and long-term investment value has emerged. Investors who are active in overseas bond products can also enter the market in advance before the Fed raises interest rates before the end of the year if they see signs that are friendly to the bond market, such as signs of progress in the U.S.-Iran war peace talks, falling raw material prices, and a slowdown in the U.S. job market. However, under the Fed led by Washu, the variables of this kind of advance position layout have expanded, so the position layout in advance should still be in a small amount.

Buy government bonds with 2-3 years maturity and layout A-grade corporate bonds with 5-10 years maturity

As for investment targets, in the past few years we have recommended focusing on high-quality corporate bonds with short maturities of 2-3 years and high credit ratings. On top of the public bond yield, you can enjoy an additional layer of low-risk corporate credit premium compensation to increase the yield. However, in recent years, this strategy has been widely imitated by the market, resulting in a large number of short-term high-quality corporate bonds being purchased by investors. As a result, the credit premium of short-term high-quality corporate bonds has sharply converged. The total yield is almost the same as that of public bonds of the same period, but the liquidity is much lower than that of public bonds. Therefore, we will change our investment strategy this year and recommend that investors can still buy short-term bonds with a maturity of 2-3 years, but mainly buy government bonds. The yield is almost the same as short-term high-quality corporate bonds, but the liquidity has significantly improved. If necessary, they can quickly sell and realize the operation again. If investors have long-term funds, overseas bonds with 5-10 years are also suitable investment targets when the yield rate has reached a high in the past 20 years. However, during this period, we recommend that investors buy high-quality corporate bonds with an international credit rating of A or above. Since corporate bonds within this period have not yet been heavily purchased by funds, their credit discounts are much more generous than short-term corporate bonds. The credit discount plus the basic public bond yield rate, the total yield can bring long-term stable income.

Under the leadership of new president Wash, the Fed will show a different look from the past 30 years. However, the system is designed to reduce human intervention. At present, it seems that although the Fed Chairman has his own will, the collective decision-making mechanism of the FOMC meeting should continue to lead U.S. monetary policy to operate under the principle of the greatest common denominator of the financial market. Therefore, the period before the end of the year is an important time to review whether the Fed's operations can reach a consensus with the financial market. If all goes well, perhaps by the end of this year or early next year, we will have another starting point for a bull market in overseas bond markets.

(The author is the deputy general manager of Mega Securities Asset Management Business Group)

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