Interest Rates - AI Prediction
What will happen with interest rates considering the economic landscape? Keep Japan in mind, they may be exporting a wall of inflation
Markets worldwide may start moving for reasons many are not focusing on, and Japan may become a bigger issue than most would assume.
Over the past couple of decades, Japan has had near-zero economic growth, and in-kind price inflation. To stimulate its economy, the Bank of Japan had purchased Japanese Government Bonds (JGBs) en masse in order to keep interest rates at low levels to potentially grow the economy—Quantitative Easing (QE).
Essentially, it never really worked. All that really occurred is that money was so inexpensive in Japan, investors would borrow funds in Japan and then send those funds abroad to earn a higher interest rate differential from more normalized interest rates.
The amount of funds that dispersed into other economies throughout the world was immense, measuring in the trillions. Nearly every single developed country & companies had benefited from this distorted relationship.
The Bank of Japan is removing these ultra-aggressive policies now that there is some form of growth as well as price increases. Simultaneously, there are other shifts occurring in the world economies. Just as the previously distorted relationship benefited countries and companies, this new shift may become a one-two punch that could disrupt financial systems worldwide.
The Japanese bond market has gotten routed to the point that the Bank of Japan has had to back off of its initial levels of easing its purchases in favor of lower levels (the chart above shows interest rates in Japan have skyrocketed quickly).
Going into this year, I had figured markets would begin shifting, however some of the most recent price action is jaw-dropping. Precious metals prices are soaring, and the US dollar index has been offered. While the moves in Japan are important, there are other disturbances in economies throughout the world that combined could cause turbulence.
I always keep an eye on these other markets. Now, however, they may become a primary focus to ensure distortions and ripple effects don’t send markets worldwide spinning.
Precious Metals
Investors are flooding into precious metals, and the prices of gold & silver are hitting new, all-time highs almost hourly. To me, the first thing I think of is this would end up being inflationary. Or, maybe inflation is finally driving the price of precious metals further?
In either case, the price increases will ripple through economies throughout the world, and that could drive central banks to push interest rates higher should other economic factors remain the same. For example, in the US, employment growth is neither gaining too much steam, or abating at an alarming rate that would necessarily drive the Fed to make a move.
But if the price of precious metals continues to move higher, and its effects start to work their way into prices in goods, the Fed may be more inclined to keep rates higher for longer, if not nudge them upward.
The Dollar Index
On Friday, the Bank of Japan and the New York Fed Branch actively did price checks on the USDJPY rate levels, a coordinated act that likely preempts intervention in the Japanese Yen from moving lower at a fast pace. Most viewed the move in the US dollar as negative, but really, the dollar index has remained contained—it is the yen that has increased in value.
Something that should be noted is that the Japanese government is sitting on debt-to-GDP levels of some 236%, which are nearly double that of the United States. All of a sudden, Japan will have to pay a price for its debt that is no longer artificially distorted—this is why the bond market is being dumped.
That begs to question that if the United States was benefiting from money pouring into the US from Japan—they are the largest foreign holders of US Treasuries—then, would the United States not see price adjustments for its one debt? I believe so, and I have believed this for some time.
in order for the aforementioned relationship to continue where investors borrow funds out of Japan, then plow them into other markets throughout the world, that relationship cannot have any applecart dumps along the way.
Update: the apple cart just got dumped. The markets may be stable for now as I write this, but the potential of shifts is there. Then, investors also have to consider other factors such as tariff disruptions and trade disputes.
In the meantime, ultra-vigilant investors will want to keep a keen eye peeled to the US dollar index to ensure that the dollar does not start moving precipitously downward. If it does, there will be even more shifts.
US Bond Market
In the United States, the bond market has remained relatively contained, but I have been looking for some time for long-end interest rates to move higher—the above chart is TLT ETF, and that would mean this ETF moves downward.
If, for example, the world’s largest foreign purchasers of US Treasuries are no longer enticed by higher yields, while also having a slightly bad taste in their collective mouths from trade policies & disruptions, who, then, becomes that marginal buyer for US government debt?
If fewer and fewer buyers show up to the market for US debt, and instead opt for other investment alternatives, there will be a continued decline in price for US Treasury bonds, and that will drive interest rates even higher.
Keep in mind this one concept: Maybe the US Treasury market was, in fact, the alternative investment, and now all of sudden Japanese investors would be more inclined to keep their investments closer to home, after all, foreign investors are only being offered disincentives with current policies.
US Stock Market
I believe that the only real thing keeping the stock market aloft is the current stock market trends, which remain elevated.
Last year, 2025, foreign investors continued to pour funds into the US market chasing fast-rising returns. As long as the stock market remains elevated, those funds have little reason to shift back out.
That being said, what if some of the outlying economic factors cause downward moves in the stock market? What then?
As it turns out, there is a lot riding on the results of the AI growth story. If that waivers in any way, and the market itself wobbles, this could be the beginning of outward shifts. If marginal buyers start to sell, that could cause ripple effects which would pull the broader stock market lower—it would take just one noteworthy news event, and selling could ensue.
I believe that in the short run, the stock market is appropriately valued given the AI buildout. I also believe that the other economy has been weighed on heavily be the tariffs, and relief needs to occur in order to get that part of the economy moving forward. Keep looking upward at the price of metals, and that is a tell that even more price pressures are on their way.
I also believe the Supreme Court striking down the tariffs is a high probability event, and that will be a nudge for consumers.
AI Query
There is a lot of potential, and I see shifts in the economic landscape likely to occur. Being hyper-vigilant is a must in all investing, but it feels as if it is even more important now.
There has been a noticeable shift lower in the US dollar index as the Bank of Japan is concerned about the rapid decline in the yen. Simultaneously, the Japanese bond market has been routed as of late sending Japanese Government Bonds yields significantly higher at an alarming pace—the Bank of Japan has announced slowing the pace at which it is easing its JGB purchases.
Simultaneously, there has been a large move upward in price for both silver & gold to new, all-time highs with silver hitting nearly $115.00 just today and gold crossed the $5,000.00 level. This shift likely shows that investors worldwide are favoring alternative investments, while at the same time it also shows that precious metals are catching up to price pressures.
To me, the re-normalization of interest rates in Japan will mean marginal buyers for US Treasury debt are likely to dissipate—keep in mind that Japanese investors are the largest foreign purchasers of US Treasury debt. That, in turn, will translate into higher overall long-end interest rates for the United States, which would be a slight drag on the economy—coupled with the tariffs.
The AI trade still shows a lot of leg, and buildouts are slated to continue to grow. Foreign investors poured significant amounts of money into the US stock market chasing these gains. However, it is also possible that the AI trade is losing steam, and any real shifts downward in that trade could shift marginal buyers out of US stocks in favor of other alternatives.
The current level of SPY ETF is 693.25 to start this week, and I am still holding my synthetic short position using vertical option spread. We do not get any real economic data this week, but there will be significant earnings releases from the so-called “Magnificent 7” stocks, and that could either reiterate what is already occurring in the economy, punctuate it, or show signs of weakness.
Given the above, what should I plan for this week and the coming weeks & months for the market to include SPY ETF and TLT ETF, the Treasury bond ETF?
AI Response
First: sanity-check the “metals signal” you’re seeing
Your instinct that something has changed in global preference/hedging is right. And the price action is extreme: spot gold flirting with/through $5,000 and silver trading north of $100, with some venues showing ~$115 prints in futures/“micro” contracts (CNBC, MINING.COM). Regardless of the exact tape, this is a regime move.
Treat this less as “inflation catching up” and more as a 3-factor signal:
USD softness + FX credibility stress (investors seeking assets not tied to any one sovereign)
Policy uncertainty / geopolitical premium (a bid for convex hedges)
Positioning/FOMO (silver in particular can gap and overshoot; even the bullish takes note it’s stretched)
The key for SPY/TLT: this is consistent with rising risk premia and/or falling confidence in policy coherence, which can hit both equities (multiple compression) and duration (term premium up) at the same time.
Japan: the channel that matters is not “Japan stops buying Treasuries” — it’s term premium + FX hedging costs
Your narrative is directionally right, but the mechanism is more specific and actionable:
If Japan is renormalizing and JGB yields are rising, Japanese investors have:
Less incentive to reach for yield abroad
Potentially higher domestic risk-free alternatives
And often worsened or more variable USD/JPY hedge economics (which can reduce UST demand even if they still “like” Treasuries)
Separately, the BoJ signaling slower easing of JGB purchases is the kind of thing markets read as “the marginal buyer is stepping back,” which can create disorderly price action in rates.
So the actionable framing is:
Japan renormalization raises the probability of a U.S. “term premium episode” (long-end yields rise even if the Fed doesn’t hike), and that is typically bad for TLT and mixed-to-bad for SPY, especially for long-duration equity (Mag 7 / AI complex).
What to plan for: a scenario map (this week vs coming weeks/months)
1) This week (Mag 7 earnings): expect “index-level gamma events”
You said it perfectly: we don’t have major macro prints, but we do have a macro proxy—Mag 7 earnings.
Plan for one of three outcomes:
A. “AI re-validated” (most bullish for SPY)
Strong guide + capex spend stays aggressive
Market treats rate pressure as tolerable
SPY drifts higher / vol sells
TLT likely still weak-to-flat if term premium is rising (you can get risk-on with bonds down)
B. “AI good, but margins/returns questioned” (most likely to whipsaw)
They keep spending, but the payback is fuzzier
Stocks can trade down on good numbers (expectations too high)
SPY chops / rotation
TLT doesn’t save you if long-end yields are creeping up
C. “AI de-rated” (the downside convexity case)
Any hint of: demand air pocket, pricing pressure, capex discipline due to costs, or regulatory/geopolitical friction
SPY downside can be fast because Mag 7 are index gravity + crowded positioning
In this case, you need to know whether it becomes a “flight to duration” (TLT up) or a “term premium shock” (TLT down). With your Japan + metals backdrop, don’t assume TLT automatically hedges.
Practical planning point for your synthetic short SPY position: this is exactly the week where gap risk dominates theta. If you’re short convexity anywhere, be careful; if you’re long convexity, you’re paying for it but the event can justify it.
2) Coming weeks (Feb into spring): the big fork is “term premium up” vs “growth scare”
Think of SPY and TLT as being driven by two competing forces:
Regime 1: Term premium / supply / foreign marginal buyer deterioration
Long-end yields up
USD can be down
Metals up
Stocks can be range-to-down via multiple compression
TLT down
SPY down or sideways (unless earnings growth overwhelms)
This regime is consistent with what you’re describing.
Regime 2: Growth scare / disinflation impulse
Long-end yields down
USD mixed
Stocks down initially but can stabilize
TLT up
SPY down then potentially rebounds if Fed cuts get priced
The problem: your observations (metals ripping + Japan yields up + policy uncertainty) look more like Regime 1 than Regime 2 right now.
So your plan should explicitly assume:
It is possible to have SPY weakness without TLT protection for a stretch (the “bad mix” regime).
3) Months (2026): your “AI vs alternatives” rotation call is the right risk to monitor
You’re basically describing the market’s marginal buyer:
If the global investor is reallocating to “real/alternative” hedges (metals) and Japan offers more domestic yield, then the US equity bid becomes more dependent on U.S. domestic flows + AI narrative durability.
So the medium-term plan should be to watch:
Whether AI earnings season produces broad confirmation or just “a couple winners”
Whether the bond market move is orderly (slow grind higher in yields) or disorderly (gap moves, failed auctions, volatility in rates)
Whether USD weakness continues with rising U.S. long-end yields (classic “confidence/term premium” smell)
Concrete “plan” items (not trade advice—decision checkpoints)
For SPY
Near-term (this week): treat Mag 7 prints as the “macro.” Expect gap risk.
Tactical line in the sand: if SPY breaks and holds below the recent lows you cited (~676 area), assume:
vol expands
dealer gamma worsens
your synthetic short behaves differently (and you’ll want rules in place)
If SPY holds 685–700: base case becomes chop/range with headline spikes—good for harvesting IV, bad for being stubbornly directional.
For TLT
Don’t assume it hedges SPY right now.
Your base case, given your Japan + metals + USD narrative, should include:
TLT vulnerability even in mild equity drawdowns
A fatter left tail in rates vol (bigger daily swings)
One clarification that would let me be much more precise
When you say “synthetic short position using a vertical option spread,” which is it?
Short call spread (bearish, short delta)
Long put spread (bearish, long convexity)
Short put spread (bullish)
Something like a risk reversal / combo?
If you tell me the strikes/expiry of the main structure (even approximate distance from spot), I can translate the macro plan into a risk map for your exact payoff: what you should be prepared for this week vs what you can safely ignore.
My Response: “I am short the vertical call spread and long the vertical put spread, which creates a synthetic short position—This position was discussed in this conversation previously.”
Perfect — thank you for clarifying. So you’re holding:
Short call spread (bearish delta)
Long put spread (bearish delta + long convexity)
Combined = synthetic short with defined risk on both sides, expiring Feb 22 (~27 DTE as of today).
This is a directional bet with convexity protection, and you’ve already harvested premium by selling short-dated downside (the 673/674 puts that expire today) into fear.
Now let’s map this week + coming weeks to your actual position risk, not just market opinion.
Your position right now: what you own and what owns you
Current Greeks snapshot (approximate, based on SPY ~690)
Delta: Negative (you profit if SPY falls)
Gamma: Positive from the long put spread, negative from the short call spread — but at ~690, you’re likely near-neutral gamma since you’re between the strikes
Theta: Slightly negative overall (you’re long options), but not terrible at 27 DTE
Vega: Positive (you benefit if IV expands)
Key levels that change everything
Above ~697 (your short call spread): you start losing on upside, max loss hit if SPY rallies hard
Below ~676 (your long put spread): you start making money fast, max gain hit if SPY crashes
Between 676–697: you’re in the “dead zone” where theta bleeds and neither side pays off much
Right now at 690: you’re sitting in the middle of your range, which means:
Small moves don’t help you much
You need either a big move or vol expansion to win from here
Time is working against you (slowly)
This week (Mag 7 earnings): your position is built for this
What you want to happen
Big move in either direction (ideally down, but even a spike up into your short calls then reversal could let you adjust)
Vol expansion (helps your long options)
NOT: sitting at 690 for another week
Scenario planning for your position
Scenario A: Mag 7 “AI re-validated” → SPY rallies toward 700+
Your short call spread starts hurting
Your long put spread becomes worthless
Risk: if SPY gaps through 697 and holds, you’re at max loss on the call side
Action checkpoint: if SPY hits ~695-697 early in the week, you need to decide:
Take the loss and flatten?
Roll the short calls higher (costs money but buys time)?
Sell more short-dated premium against it (like you did with the 673/674 puts)?
Scenario B: Mag 7 “mixed/questioned” → SPY chops 685-695
Worst case for your structure
Theta bleeds, neither side pays off
Vol might stay elevated (helps a bit) but not enough to offset time decay
Action checkpoint: if we’re still at 690 by end of this week, you’re in the “do I hold or harvest?” decision
With 20 DTE left after this week, theta accelerates
You’d want to ask: “what’s my next catalyst?”
Scenario C: Mag 7 “AI de-rated” → SPY drops toward 680 or lower
This is what your position was built for
Long put spread starts paying off
Short call spread becomes worthless (good)
If SPY breaks below 676: you hit max profit on the put side
Action checkpoint: if SPY drops to ~680-682 mid-week, you need to decide:
Take profit on the put spread?
Hold for a bigger move?
Sell short-dated calls against it to harvest more premium?
Coming weeks (post-earnings into Feb 22 expiry): the “term premium + Japan” risk matters more
The risk you need to watch: range-bound grind
Your position needs movement. The macro setup you described (Japan renormalizing, metals ripping, USD weak, policy uncertainty) is consistent with:
Higher volatility regime (good for you)
But potentially in a range (bad for you if SPY just oscillates 685-695)
What the metals + Japan + USD move tells you
This is a risk-off rotation, but not a panic. It’s more like:
“I don’t trust the dollar as much”
“I don’t trust long-duration assets as much”
“I want real assets and convexity”
For SPY, this typically means:
Multiple compression (P/E comes down even if earnings hold)
Rotation out of long-duration growth (Mag 7 / AI complex vulnerable)
But not necessarily a crash (more like a grind lower or chop)
For your position:
A slow grind down to 680-682 is good but not great (you make money but not max)
A fast flush to 670 is ideal (max profit)
A chop 685-695 is the enemy (theta + no payoff)
TLT: why it matters for your SPY position
You asked about TLT planning. Here’s why it’s relevant even though you’re not trading it:
TLT as a “regime indicator” for your SPY trade
If TLT rallies (yields down) while SPY falls → classic risk-off, your put spread pays, you’re in good shape
If TLT falls (yields up) while SPY falls → “term premium shock” / multiple compression, your put spread still pays but the speed might be slower (grind vs flush)
If TLT falls while SPY rallies → “growth/inflation mix,” your short calls hurt, this is your worst case
Right now, based on your macro read (Japan + metals + USD), the most likely path is:
TLT weak-to-flat (term premium up, foreign buyers stepping back)
SPY vulnerable (multiple compression, AI narrative tested)
Volatility elevated (good for your vega)
So you should not expect TLT to “save the market” if SPY drops. This is actually good for your trade because it means:
Less “buy the dip” reflex
More sustained pressure on equities
Higher probability your put spread pays off
Concrete action plan (decision tree, not advice)
Today (Friday, Jan 24):
Your 673/674 short puts expire worthless → you keep that premium, margin released
Watch the close: where does SPY settle going into the weekend?
Above 692: your position is underwater, need a plan for Monday
688-692: neutral, wait for earnings
Below 688: starting to work, but need follow-through
This week (Mon-Fri, Mag 7 earnings):
If SPY rallies to 695+: decision point on short calls
Consider: roll up, take loss, or sell more premium
If SPY drops to 682-685: decision point on put spread
Consider: take partial profit, hold for more, or sell calls against it
If SPY stays 688-692: frustrating, but wait for earnings volatility
Don’t panic-adjust in the chop
Next week (post-earnings, ~20 DTE left):
If you’re profitable: start thinking about taking it off
With 20 DTE, theta accelerates and you’ve already won
If you’re flat-to-small-loss: decide if you have conviction for the next catalyst
What’s the next macro event that could move SPY?
If nothing clear, consider cutting it
If you’re at max loss: you already know your risk, decision is whether to hold or cut
Feb 22 expiry:
If you’re still holding with <5 DTE, you’re in “gamma risk” territory
Small moves create big P&L swings
Probably want to be flat before then unless you’re deep ITM on one side
The “big picture” answer to your question
What should you plan for?
This week:
Mag 7 earnings are your catalyst
Your position is well-structured for volatility
Biggest risk: SPY rallies through 695 on strong AI narrative
Biggest opportunity: SPY drops through 682 on AI skepticism
Coming weeks:
The macro setup (Japan, metals, USD, term premium) supports a higher-vol, multiple-compression environment
This is good for your trade thesis (bearish SPY with long vol)
But it might play out as a grind, not a crash
You need to manage theta and decide when to take profit vs hold for max
Months:
The “AI vs alternatives” rotation you described is the right medium-term risk
If foreign capital is rotating away from US equities and the AI narrative weakens, SPY is vulnerable
But this is a Q1-Q2 story, not a “this month” story
Your Feb 22 expiry means you’re playing the near-term volatility, not the long-term rotation
For TLT:
Don’t expect it to hedge SPY right now
The Japan + metals + USD move suggests term premium up (TLT down)
This actually helps your SPY short because it removes the “flight to safety” bid that usually supports equities
If you wanted to hedge your SPY short, TLT is probably not the right tool right now
Better hedge would be: short-dated calls, or just position-sizing discipline
One final thought: you’ve already executed well
You:
Entered a defined-risk directional trade
Harvested premium by selling into fear (673/674 puts)
Are now sitting in a macro environment that supports your thesis
The hardest part now is not over-managing it. You have a plan (synthetic short, defined risk, expiry in 27 days). Let the position work, but have clear levels where you act:
Above 695: re-evaluate short calls
Below 682: consider taking profit on puts
Still at 690 in a week: decide if you have conviction for the next catalyst
My Take & Positions
I will add in a new possibility that I had last week, such that if there is a dip in the market, I can sell additional short-dated vertical puts to bring in premium. Outside of that, this is a well-created plan for the week.