CBOT: Micro 2-Year Yield ( 2YY1!), Micro 10-Year Yield ( 10Y1!)
Last Thursday night, I watched the first Biden-Trump presidential debate live on TV, along with tens of millions of likely voters of the 2024 US presidential election.

Who won the debate? According to the exit poll conducted by 538/Ipsos:
• 60.1% of the likely voters being polled said former President Trump performed best;
• Only 20.8% said President Biden performed best at the debate.

However, the debate may not change the minds of many voters.
• Biden gained support from voters who would likely vote for him, from 46.7% before the debate, to 48.2% after that;
• Trump also gained support modestly, from 43.5% to 43.9%;
• Robert Kennedy, Jr., an independent presidential candidate who did not participate in the debate, saw his support increase from 17.3% to 18.4%.

What mattered most to voters?
• Inflation or increasing costs is the No. 1 issue, called out by 50% of the likely voters;
• Immigration came in 2nd at 37%, while Political polarization is the 3rd at 25%.

The second and final presidential debate is scheduled on September 10th. Ahead of this, the Republican National Convention will be held on July 15th-18th. Donald Trump is likely to be nominated as the Republican candidate for the US presidential election.

The Democratic National Convention will be held on August 19th-22nd. After his poor performance in the first presidential debate, we are uncertain if President Biden will be nominated, or replaced by an alternative candidate.

On TradingView, our focus is always on trading and investing. However, geopolitics plays a crucial role in shaping global markets, influencing economic growth, investment flows, and asset prices. Understanding the complex interplay between political events and market dynamics is essential for investors seeking to navigate the ever-changing landscape. That being said, I would like to outline these generic scenarios:
• If President Biden is re-elected for a 2nd term, he would likely maintain similar political and industry policies which we have been seeing in his first term;
• If Former President Trump returns to the White House, we would likely see huge reversal in the policies enacted by the current Administration.

What Donald Trump did in his first term will be a good indicator for what lies ahead. Looking across asset classes, I think the interest rate regime will be impacted the most in a Trump-winning scenario.

The US Interest Rate Regime
In the 21st century, we have four US presidents so far: George W. Bush (2001-2008), Barack Obama (2009-2016), Donald Trump (2017-2020) and Joe Biden (2021-2024).

The US Federal Reserve also has four Chairmen: Alan Greenspan (1987-2005), Ben Bernanke (2006-2013), Janet Yellen (2014-2017) and Jerome Powell (2018-2026).

I observe that Fed Funds Rate exhibited unique pattern under each president. Let’s look at President George W. Bush first:
• The younger President Bush came into the White House when the Internet bubble just busted, and the Enron and WorldCom scandals shook the stock markets. “9/11” occurred less than 8 months into his presidency.
• Fed Chair Alan Greenspan executed steep rate cuts to rescue the economy in crisis, pushing the Fed Fund rate down to 1% from 6.5%.
• By 2004, the economy has recovered and became overheated. To combat inflation, Chairman Greenspan hiked interest rate all the way to 5.25%.
• High interest rates busted the subprime housing market, triggering the Great Recession of 2008. New Fed Chair Ben Bernanke steered the country through the financial crisis, and lowered interest rates to 0-25 basis points.

The Obama Administration (2009-2016):
• President Obama inherited the Zero Rate environment, and throughout most of his 8-year presidency, interest rates largely stayed at the ultra-low levels.
• In the 3rd year of her Fed Chair tenure, Janet Yellen began raising interest rates, from 0-25 bps to 1.25% by the end of her four-year term.

The Trump Administration (2017-2020):
• In November 2017, President Trump nominated Jerome Powell as new Fed Chair.
• Chairman Powell continued the rate hike and raised the Fed Funds rate to 2.25%.
• President Trump openly criticized his Fed Chair and intervened central bank policy.
• Under great pressure, the Fed lowered rates in 2019. With the pandemic sending the economy into a free fall, Fed Funds rate was back to 0-25 bps by April 2020.

The Biden Administration (2021-2024):
• During the pandemic, a global supply chain bottleneck pushed US inflation to a 40-year-high at 9.1% by July 2022.
• Albeit initially assessing the inflation as transitory, the Fed launched a series of rate increases beginning March 2022, pushing the Zero Rate to 5.25-5.50% by 2023.
• While the US CPI came down to about the 3-3.5% range, the Fed was hesitant to lower rates too early. It had maintained the current rate in the last seven FOMC meetings.

As we observed from the above, Donald Trump strongly believes that high interest rates would hurt the economy. He would go out of his way and convince the Fed to lower rates. What he considered “too high” was 2.25% in 2018. The Fed Funds rate is now more than doubled at 5.25-5.50%.

In my opinion, in a Trump-winning scenario, he would call for the Fed to lower rates as soon as he returns to the White House. The Fed would cave in again, and quicken its rate cut schedule.
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Trading with CBOT Micro Yield Futures
For someone who shares my view of aggressive rate-cut schedule under a new Trump Administration, he could express it by trading with CBOT Micro Yield Futures. Unlike bond futures, Micro Yield contracts quote the respective interest rates directly. A lower interest rate means lower futures prices.

Last Friday, the August contract of Micro 2Y Yield futures (2YYQ4) were settled at 4.628%. Each contract has a notional value of 1,000 index points, or $4,628 at the current price. To buy (long) or sell (short) 1 contract, a trader needs to deposit an initial margin of $330.

The August Micro 10Y Yield (10YQ4) settled at 4.318%. Notional value is 1,000 index points or $4,318. Initial margin is $320.

In my opinion, rate cuts are coming, but the timing is uncertain. At what point the presidential pressure will cause rate cuts to speed up is also uncertain.

To counter the uncertainty, a trader could use a Futures Rollover strategy. This is to maintain a Short position on Micro Yield Futures over time. When an existing contract is about to expire, we could close the position by buying the same contract, with the long order offsetting the short position. Meanwhile, the trader could enter a Short position with the newly listed contract.

Happy Trading.

Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.

CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
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Jim W. Huang, CFA
jimwenhuang@gmail.com
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