To The Moon

This week’s FOMC meeting will set the near- to medium-term rhythm for markets. But the key issue is not simply whether the Fed raises rates; it is how Treasury yields at the front end and long end of the curve will be repriced. The 10-year Treasury yield is now approaching—or has already touched—the sensitive 5% threshold. Markets are concerned both that further increases in long-dated yields could crush richly valued assets and that excessive policy tightening could push up front-end rates and quickly hit equities.

In our view, four possible meeting outcomes could unfold this week. All ultimately revolve around the tug-of-war between the front end and the long end of the yield curve, although the implications for individual asset classes differ across scenarios.

A Tense Yield Environment

Ahead of the FOMC decision, the most appropriate course of action may be to wait rather than rush into trades. FX markets and the long end of the Treasury curve have already substantially priced in this week’s policy move. The real uncertainty is the extent of disagreement within the Federal Reserve: how many officials will oppose a rate hike, and how many will favor a more aggressive tightening path. The dot plot, the post-meeting statement, and Warsh’s forward guidance on the future rate path will be the key factors capable of changing the market’s direction over the near to medium term.

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From the weekly technical structure of the 10-year Treasury yield, its short-term uptrend remains intact. So long as the rise in oil prices has not come to an end, pressure for yields to move higher will be difficult to dissipate. Should the 10-year yield decisively break above the prior high of its cup-base formation—around 5%—the impact would extend beyond equity indices and would likely also put renewed downward pressure on gold.

$美国10年期国债收益率(US10Y.BOND)$ $美国2年期国债收益率(US2Y.BOND)$

Goldman Sachs has previously observed that when the 10-year Treasury yield rises by more than two standard deviations over a three-month period, equities typically experience a meaningful negative reaction.

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This is why, while the market appears to be debating whether the Fed will raise rates this week, its deeper concern is whether long-end yields can peak. A continued increase in long-dated yields would directly compress equity valuations, reduce the appeal of dollar-denominated assets, and raise government interest costs. With the midterm elections approaching, a pronounced selloff in U.S. equities and a weaker dollar would both create pressure on Trump’s electoral prospects.

Policymakers therefore face a difficult challenge: restraining further increases in long-end yields without allowing excessively rapid tightening to push front-end yields high enough to deliver an overly severe shock to equities. Frankly, this is no ordinary task.$A50指数主连 2609(CNmain)$ $恒生指数(HSI)$

Technicals Turn Red First

Technical indicators have already reflected the market’s tension. On the NYSE, trends in the percentages of stocks trading above their 20-day, 50-day, 100-day, and 200-day moving averages are all negative. In particular, only about 28% of stocks are above their 20-day moving averages, pointing to weak market breadth and suggesting that the near-term downside has not yet been fully absorbed.

The equal-weight S&P 500 has also fallen below its 50-day moving average. At the same time, the RSI has dropped below its midpoint and the MACD has moved below the zero line—a combination similar to the technical signals seen during the previous break below the 50-day moving average. In other words, this is not simply a case of weakness among a small number of index heavyweights; signs of deterioration are emerging in the market’s internal structure.

Accordingly, if the 10-year yield breaks above 5%, pressure on equities may extend beyond sentiment and become mutually reinforcing through three channels: valuation discounting, financing costs, and risk appetite. The faster long-dated yields rise, the greater the adjustment pressure on high-valuation assets.

Four FOMC Scenarios

Pricing in the 2-year Treasury yield suggests that markets have already incorporated roughly 100 basis points of rate hikes over the next two years: the 2-year yield had priced in approximately 4.7%, while the current upper bound of the policy rate is 3.7%. This implies that a 25-basis-point hike this week is widely expected. What markets truly care about is whether the FOMC will validate the remaining roughly 75 basis points of tightening expected over the next two years.

Assuming 25-basis-point increments, markets are effectively trading a path of three additional hikes after this week’s move—four hikes in total, including this week’s increase. We see four plausible scenarios:

Scenario 1: No Rate Hike

This is a very low-probability outcome. If the FOMC were to hold rates steady, markets could interpret it as insufficient action by the Fed and a blow to the institution’s credibility. Morgan Stanley expects that such an outcome could cause the one-year overnight index swap rate to fall by 25 basis points and the 2-year Treasury yield to decline by 20 basis points in the near term. Gold and U.S. equities could rally sharply on the surprise dovish signal, while the dollar could weaken materially as Fed credibility is called into question.$黄金主连 2612(GCmain)$ $黄金ETF-SPDR(GLD)$ $美元ETF-PowerShares DB(UUP)$ $白银主连 2612(SImain)$ $微黄金主连 2612(MGCmain)$

However, this would not necessarily usher in a sustained bull market for equities. A decline in front-end yields would not eliminate the pressure on the long end from inflation and bond supply; indeed, long-dated yields could continue to rise rapidly. Therefore, even if U.S. equities initially surge, they may still fail to break above prior highs and could subsequently retreat as long-end yields move higher.

Scenario 2: A Rate Hike Without Clear Guidance

We view this as the most likely scenario. Warsh’s prior communication style has tended to avoid overly difficult directional commitments. The FOMC could therefore deliver a rate hike while maintaining a balance between hawkish and dovish signals on future inflation control and the policy-rate path, without providing explicit guidance to the market.

In this case, front-end yields could actually decline, as markets may conclude that this hike does not necessarily mark the confirmed beginning of a sustained tightening cycle. Long-end yields, however, could remain elevated or rise further because inflation risks and fiscal pressures would not have been adequately addressed. The yield curve would therefore remain under further pressure. U.S. equities could trade choppily at first and then continue to weaken, while gold would likely struggle to reverse its current daily-chart downward momentum immediately.

Scenario 3: A Rate Hike Coupled With Guidance to Unwind the 2025 Easing Policy

This is a high-probability option that is more hawkish than Scenario 2. Warsh may state explicitly or imply that the current easing path will gradually be unwound, while confirming that the labor market is close to full employment. Markets would view this as a clearer tightening signal.

Front-end yields would rise in this scenario. Long-end yields could initially decline before trading sideways at elevated levels or moving higher again, and the degree of yield-curve steepening could ease temporarily. U.S. equities could first undergo a deeper correction before rebounding. The dollar would tend to recover, while gold could remain under pressure and move lower.

Scenario 4: A Rate Hike With an Explicit Commitment to Bring Down Inflation

This is a lower-probability but highest-impact, strongly hawkish scenario. The Federal Reserve could shift from a tolerant, “New Deal-style” committee toward a more disciplined central bank, committing to bring inflation back to target rapidly and allowing markets to fully price a higher terminal rate into asset prices.

If this scenario materializes, front-end yields could continue to rise. Long-end yields, by contrast, may finally peak and decline because markets would regain confidence in the Fed’s determination to control inflation and preserve the credibility of the currency. The dollar could rebound, while U.S. equities and gold could fall simultaneously in the short term. Naturally, this is also the least likely scenario.$WTI原油主连 2610(CLmain)$ $罗素2000指数主连 2612(RTYmain)$

The Long End Is the Hard Part

Regardless of which scenario ultimately plays out, it will not be easy for long-dated yields to establish a genuine peak. Reversing the trend would require several conditions to emerge together: a clearly hawkish policy stance, a rebound in the Dollar Index, a peak in oil prices, and easing tensions between the United States and Iran. Only then could forward inflation expectations be more effectively contained, allowing long-end yields to stop rising or enter a period of range-bound trading at elevated levels.

The difficulty also stems from bond supply. JPMorgan estimates that total investment in artificial intelligence and data centers could reach approximately $5.5 trillion between 2026 and 2030. Of that amount, only about $1 trillion may be covered by internal cash flow, while approximately $2.1 trillion may need to be financed through investment-grade bond issuance. This suggests that, over the next four years, U.S. technology, banking, utilities, health care, and energy companies could issue roughly $2 trillion in bonds, competing for capital with Treasuries yielding about 5%. Medium- to long-term corporate bond yields will therefore also be difficult to bring down materially.

Accordingly, if policymakers allow long-end yields to keep rising, both U.S. equities and the dollar will face greater pressure. If they seek to force long-dated yields lower, they must earn market trust through a more credible approach to inflation management. The FOMC’s truly difficult task is to find a market-acceptable balance between these two objectives.

Strategy Discussion After Waiting

Ahead of the meeting, directional bets carry substantial risk. For traders with higher risk tolerance and larger capital bases, it may be worth considering a tactical trade for a rebound in the VIX: buying VIX exposure on dips with small position sizes, or purchasing both equity-index puts and calls as a long straddle. These strategies are clearly speculative, and the maximum loss should be capped within 30 percentage points of prior gains, so that an incorrect call does not undermine overall capital management.$标普500波动率指数(VIX)$ $1.5倍做多短期期货恐慌指数ETF-Proshares(UVXY)$

Specifically, take profits on last week’s short-put strategies in equity indices and NVIDIA, and convert part of the equity-index exposure into a small long-straddle position: buy puts and calls expiring in two weeks to capture potential gains from a post-FOMC rebound in the VIX. At the same time, investors may continue selling Marathon Petroleum puts at lower levels.$英伟达(NVDA)$ $马拉松原油(MPC)$

For gold, consider a directional long-put position to position for a continued decline. Gold’s overall structure remains bearish, with a relatively clear topping pattern. The 4,258 level is a near-term resistance reference; if that level fails to hold, prices could test the area around 4,000.

Based on last week’s options income, the strategy is currently still generating solid profits.