Capital Markets Activity & Outlook - Capital markets franchises are experiencing bursts of activity, with investment grade markets running at or near record highs in both the US and Euro markets [2] - The Euro market has an increased share of global financing, attracting US corporates seeking lower yielding markets [3] - The outlook for capital markets remains robust, with leverage finance and US IPOs showing significant activity [3] - The path of least resistance points towards continued robust activity overall, despite some policy uncertainties [4] Interest Rates & Fed Policy - Issuers are not necessarily counting on Fed cuts this year, aligning with market pricing expectations of a couple of cuts through the end of the year and more into 2026 [5] - Elevated term yields in the US Treasury market, with a term premium of around 80 to 85 basis points, act as a tax on mortgage rates and corporate borrowing rates [5][6] - Noise around the potential change in Fed chair contributes to a term premium of approximately 20 to 25 basis points [9] - Markets are pricing in a higher probability of less consensus among FOMC voting members, potentially leading to increased uncertainty and volatility [11][13] Treasury Market - The path of least resistance in treasuries is towards a steeper curve [10] - Treasury financing is expected to remain concentrated in short duration markets [11] Market Sentiment & Risk - The market reacted strongly to news regarding the Fed chair, indicating sensitivity to changes in leadership [8] - Volatility and risk premium may rise as a new Fed era approaches, suggesting a potentially attractive environment for continued financing [18] - Credit spreads are in the bottom 1% over the last two decades, indicating a favorable financing environment [18]

Investment Rating - The report maintains a bullish stance on U.S. Treasury duration and recommends staying long in curve steepeners [6][41]. Core Insights - The report highlights a dynamic labor market with slower private payroll growth but a low unemployment rate, indicating lower potential growth and equilibrium rates, which may lead to more Federal Reserve rate cuts [6][9][32]. - The employment report shows strength in state and local government jobs, particularly in education, which contributed significantly to overall payroll growth [10][11][22]. - The report suggests that as market-implied trough rates decrease, U.S. Treasury yields are expected to fall, supporting a bullish outlook on U.S. Treasury duration [35][41]. Summary by Sections Labor Market Analysis - The June employment report indicates slower private payroll growth, with a tighter labor market due to a decline in the labor force participation rate [9][32]. - State and local governments added 80,000 jobs in June, with education jobs accounting for 63,000 of these [11][12]. - The report notes that fewer teachers left for summer break than anticipated, which may have artificially boosted the seasonally adjusted figures [18][22]. Economic Outlook - The report emphasizes that lower potential growth will likely weigh on the equilibrium interest rate, suggesting that the Fed may need to cut rates more than currently expected [33][34]. - It is anticipated that the Fed's longer-run target rate may need to be adjusted downward over time [33][34]. Investment Strategies - The report recommends maintaining long positions in U.S. Treasury securities, particularly in the 5-year maturity sector, and suggests a UST 3s30s yield curve steepener [41][46]. - Specific trade ideas include maintaining long positions in UST SOFR swap spreads and SFRZ5 futures, with targets set for various instruments [46][49].

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - The report discusses the volatility in developed market (DM) yields due to fluctuating tariff headlines and significant movements at the long end of the yield curve, particularly following the US downgrade by Moody's and weak long-dated bond auction results [1][4][5] - The report anticipates further rate cuts from the European Central Bank (ECB) and the Reserve Bank of New Zealand (RBNZ), with the ECB expected to lower rates by 25 basis points to 2% [1][33] - The term premium in 5Yx5Y EUR rates has increased since the start of 2025 but remains below the peaks observed in 2022, indicating a complex interaction of supply and demand dynamics in the long end of the curve [1][10][13] Summary by Sections Market Dynamics - Recent weeks have seen choppy movements in DM yields, influenced by tariff announcements and the US credit rating downgrade, leading to a bear steepening of curves that has since retraced [1][2][4] - The long end of the yield curve has been particularly volatile, with Japan experiencing the largest one-day swings in 30Y JGB yields in a decade [1][7][9] Central Bank Actions - The RBNZ has cut policy rates by 25 basis points to 3.25%, with a hawkish tone suggesting limited further cuts in the near term, while the ECB is expected to cut rates next week without signaling future moves [1][33] - The report highlights that the RBNZ is likely to hold rates through the second half of 2025 and implement further cuts in early 2026 [33] Term Premium Analysis - The report notes that term premia uncertainty is more impactful on 5Yx5Y or 10Y yields than on longer maturities, with current term premiums in EUR intermediate swaps appearing excessive relative to macroeconomic drivers [10][18][19] - The estimated term premium has increased since the start of 2025 but remains subdued compared to 2022 levels, indicating potential mispricing in the market [13][16][18] Yield Curve Comparisons - The report compares 5s/30s curves across different markets, noting a strong positive correlation between the curves in the US, UK, and Eurozone, with the UK exhibiting a higher beta relative to the US [24][25][22] - It concludes that the excessive steepness of the 5s/30s curves globally has moderated but is unlikely to fully normalize, particularly for USD and GBP curves due to limited political appetite for fiscal tightening [25][30]