• Cooling inflation driven a bond rally this month
• Treasury yields drop propel stocks higher

Cooling inflation has triggered a significant bond rally this month, propelling markets to record highs.

The surge in bond prices has led to a nearly half-percentage-point drop in the 10-year U.S. Treasury note yield since May. This yield is strongly affected by investor expectations regarding short-term interest rates set by the Federal Reserve.

Recently, the Federal Reserve indicated a cautious stance towards reducing interest rates in the near future.

Last week, all fed officials unanimously predicted a single rate cut this year—a drop from the three cuts predicted in March and fewer than the two cuts some analysts had anticipated.

Despite this conservative forecast, investors did not seem to care.

Data from futures markets revealed that investors are betting there’s over a 70% probability^[1]the Fed will lower rates at least twice this year, with the initial reduction likely in September. This expectation is twice as high as the one given in late May.

Investors have recently welcomed indications that the job market is slowing down, a development that could help reduce inflation further. The unemployment rate increased slightly to 4% in May, up from 3.4% in mid-last year.

Throughout much of this year, stocks have successfully navigated through rising bond yields, partly spurred by enthusiasm for artificial intelligence.

Since the onset of the bull market in late 2022, a few large tech companies have largely propelled the performance of the S&P 500. Although the range of leading stocks broadened earlier in the year, it has recently contracted, causing concern among some market participants.

Source: Tradingview

The 10 biggest stocks recently represented 37.5%^[2] of the index’s total value, the highest since the “Dom.com” bubble days.

However, unlike the last time the market was this concentrated in the early 2000s, the biggest companies today are profitable and have strong balance sheets.

The benchmark has risen over 50% since reaching its lowest point in October 2022, following a bear market caused by the Federal Reserve’s aggressive interest rate hikes beginning in March 2022 to control rampant inflation.

Investors can long the largest 500 stocks using our 3x US 500, 5x US 500.

Alternatively, traders can short the largest 500 stocks using our -3x US 500.

1. CME Group
2. Factset