Guosen: Dumbbell strategy to deal with high volatility, strictly control duration and wait for clear signals.

Guosen released a research report stating that the outlook for the market highly depends on the evolution of the Middle East geopolitical conflict and inflation data path. Before the policy direction becomes clear, high volatility in the interest rate market will become the norm. It is recommended to adopt a defensive barbell strategy: on one end, allocate short-duration bonds to maintain portfolio liquidity and capture the yield curve steepening for riding returns; on the other end, select core assets (such as investment-grade corporate bonds) with stable cash flow, strong pricing power, and high credit quality. Strictly control the overall portfolio duration to avoid excessive exposure to long-term interest rate risks, especially as the 30-year yield approaches the key level of 5%. Investors are advised to remain patient and gradually increase risk exposure after geopolitical tensions ease and inflation data shows a clear turning point. Macro chess game: Geopolitical risk premium and inflation stickiness reshape policy expectations Recently, the U.S. bond market has been continuously impacted by the geopolitical risk premium and stubborn inflation. The 10-year U.S. Treasury yield remains at a high of 4.3%, with the 30-year yield reaching 4.91%, reflecting deep concerns about the sustainability of inflation in the market. Although U.S. economic data show resilience, the composite PMI rose to 52.0 in April, a three-month high, and the manufacturing PMI reached 54.0, the highest in nearly four years. However, the Iran conflict significantly pushed up short-term inflation, with March CPI rising to 3.3% year-on-year, and core PCE remaining high at 3.0%. Market expectations for the Fed's policy path are experiencing a complex adjustment, with interest rate futures completely ruling out the possibility of a rate cut this year, but also not expecting another rate hike, reflecting investors' consensus that the Fed will maintain high rates for longer. This stagflation worry, combined with wait-and-see policy, has led to high volatility in U.S. bond yields, even though the MOVE index remains low, geopolitical uncertainties continue to disturb market sentiment. Market performance: Slight steepening of the yield curve, traditional safe-haven function of U.S. bonds challenged The 10-year U.S. Treasury yield remains flat compared to two weeks ago, while the 2-year yield has dropped by 3 basis points to 3.78%, showing a steepening characteristic. The long end of the yield curve is blocked from downward movement due to rising inflation expectations, while the short end remains strong due to delayed rate cut expectations. It is worth noting that the traditional safe-haven function of U.S. bonds has significantly weakened in this round of geopolitical conflict and energy supply shocks, with the April U.S. Consumer Confidence Index at only 49.8, still at historic lows, and short-term inflation expectations as high as 4.8%; investors have not flocked to long bond hedges on a large scale, but instead remain cautious due to concerns about inflation pressure and fiscal risks. Policy outlook: Fed policy tilting towards anti-inflation With inflation pressures resurfacing, the Fed is forced to recalibrate its policy priorities. March CPI rose by 3.3% year-on-year and consumer inflation expectations significantly increased, combined with the PMI price sub-index reaching an 11-month high in April, forcing the Fed to place anti-inflation measures at a more core position. The latest market expectations show that the probability of the Fed maintaining rates unchanged at the April meeting is 100%, with a cumulative rate cut of only 11 basis points before the end of the year. Fed Chair nominee Powell emphasized during the confirmation hearing that "maintaining low inflation is key to protecting the central bank from external criticism", showing a hawkish tone in his policy stance, promising policy independence while hinting that rate cuts will remain cautious and moderate. Unless geopolitical conflicts cause a sharp contraction in economic activity, maintaining restrictive rates to anchor long-term expectations in the context of stubborn inflation will become the Fed's primary choice, with the timing of policy shift significantly delayed compared to market expectations at the beginning of the year.