The Federal Reserve is lost, where should investors go?

When the world's largest central bank, the Federal Reserve, chooses to remain silent or unclear about its future monetary policy direction at critical moments, its shock effect is far-reaching. Every small decision by the Federal Reserve could potentially lead to significant changes in the financial markets. This time, when its decision-making direction becomes blurred, the global capital market responds, especially the US bond market.

Although the US economy has shown some resilience, the Federal Reserve has not clearly provided policy direction. This hesitation has made the market even more uneasy. Investors crave clear signals, but the Federal Reserve seems to be playing with the investors in front of them. This has filled the global market with anxiety and uncertainty. On the one hand, geopolitical risks are heating up and the issuance of US bonds is increasing. The escalation of geopolitical conflicts has also intensified market anxiety. The escalating conflict between Israel and Palestine has led to a significant number of casualties in Israel's attacks on Gaza, making investors more conservative and driving down long-term US bond yields. On the other hand, the increase in US bond issuance is driving up long-term yields. In the past three months, the growth in the issuance of US bonds helped to increase the term premium by more than one percentage point, thus driving a sharp rise in long-term yields. Term premium is a risk compensation for long-term bond holders. In the past decade, the 10-year US Treasury term premium has remained below zero (temporarily positive from March to June 2021), but in the past week, the 10-year US Treasury term premium has turned positive for the first time since June 2021.

Despite the Federal Reserve's efforts to convey the long-term vision of interest rate policy, the market is still full of uncertainty. Investors need a clear direction and a definite direction. The Federal Reserve's hesitation and lack of clear direction have made the market even more chaotic. People generally lack firm beliefs and don't know where things should end up. This uncertainty is causing more volatility. The market needs a more stable environment and clearer guidance.

At present, the market turbulence will continue. Investors need to remain calm, examine market changes, and do a good job in risk control. No matter how volatile the market may be, this prolonged period of turbulence will always pass and the market will return to calm.