US Treasury Secretary Scott Bessent said he does not want the US to decouple from China, and instead aims to reduce risk in the relationship. He also said there is a good chance US GDP growth in 2025 will be 3%.
Bessent said the bond market is so tame because the government is sorting the fiscal house. He also said inflation could return close to the Federal Reserves 2% target by the middle of this year.
Inflation Cooling And Policy Shift
With expectations that inflation will approach the Feds 2% target by summer, traders should anticipate a shift in monetary policy. The January 2026 CPI report showed inflation cooling to 2.4%, supporting this outlook and making interest rate derivatives particularly active. We believe positions that benefit from a future rate cut, such as buying SOFR futures, are becoming more favorable.
The bond market is calm, which presents a clear opportunity now that our fiscal situation appears more stable. The 10 year Treasury yield has settled in a narrow range around 3.6%, a stark contrast to the volatility we saw back in 2023 and 2024. This suggests call options on long duration bond ETFs could offer upside as the market begins to more seriously price in rate cuts for the second half of the year.
Given that 2025 GDP growth came in strong at 3.1%, the odds of a recession in the near term have diminished significantly. This solid economic footing makes selling out of the money put options on major indices like the S and P 500 an attractive strategy for collecting premium. We are seeing reduced demand for downside protection as a result of this sustained growth.
This environment of predictable growth and cooling inflation is likely to keep market volatility suppressed. The VIX is currently trading near 14, reflecting a lack of fear that we havent seen since before the inflation spike of the early 2020s. Traders should consider strategies that profit from low or falling volatility, such as selling VIX call spreads.
China Derisking And Sector Winners
The ongoing strategy to de risk, not decouple, from China continues to create distinct winners and losers. This favors targeted sector plays over broad market bets. We should use options to gain exposure to domestic semiconductor and industrial ETFs, which continue to benefit from policies encouraging reshoring.
