Investment Summary August 2025

Investment Summary

The Federal Reserve is likely to cut interest rates due to weakening employment rate despite of persistent inflation concerns, while the Bank of Japan is expected to moderate its pace of rate hikes, making a significant narrowing of the interest rate differential between the US and Japan improbable .

Key Metrics

US Treasury Yields

• Yields are currently higher for longer maturities, reflecting expectations that interest rates will not decline significantly .*

Opportunity-Risk Analysis

Key Points & Rationale

1. US Interest Rate Policy

• Key Point: The Federal Reserve's long-term interest rate target has shifted from 2.0% to 3.0% .

  • Rationale: This shift indicates the Fed's underlying belief that inflation will not easily fall below 2% .

• Key Point: The Fed is hesitant to raise interest rates despite inflation concerns .

  • Rationale: US unemployment has risen from mid-3% to early 4%, and the job market is cooling, making rate hikes burdensome for economic growth .

• Key Point: The Fed is prioritizing inflation controlover economic growth .

  • Rationale: While growth is slowing, inflation has exceeded its target for four years and poses a greater long-term risk, especially with potential tariffs .

• Key Point: Long-term US Treasury yields are higher than short-term yields .

  • Rationale: This reflects market expectations that interest rates will not decrease significantly and that future inflation premiumsare necessary .

2. Political Influence on the Fed

• Key Point: Former President Trump is pressuring the Fed to lower interest rates .

  • Rationale: Lower rates would reduce the government's interest expenses on debt, allowing for more fiscal spending .

• Key Point: The Fed is likely to resist political pressure to cut rates .

  • Rationale: Succumbing to political influence could erode market confidencein the Fed and trigger higher inflation expectations .

3. US-Japan Interest Rate Differential

• Key Point: A significant narrowing of the interest rate differential between the US and Japan is unlikely .

  • Rationale: The US Fed is cautious about rate cuts due to inflation, while the Bank of Japan is expected to moderate its pace of rate hikes, learning from past experiences .

• Key Point: Yen carry trade liquidation is not highly probable .

  • Rationale: The Bank of Japan is expected to adjust its policy based on US economic conditions, preventing a sudden, drastic narrowing of the rate gap .

Action Items

• Q4 2025: US Presidential Election

  • Monitor the newly appointed Fed Chair's stance on interest rates and inflation .

• Ongoing: US Inflation Trends

  • Track US inflation data to assess the Fed's continued hawkish stance .

• Ongoing: US Employment Data

  • Observe US employment figures for signs of further cooling that could influence Fed policy .

• Ongoing: Bank of Japan Policy

  • Monitor the Bank of Japan's interest rate decisions and statements for any shifts in their pace of tightening .