Treasuries pared declines after Federal Reserve Governor Christopher Waller, who’s under consideration to become chair of the central bank, reiterated his dovish views on US interest rates https://t.co/MFA1X5nPqI ...

Core Viewpoint - Oil prices stabilized after a 2% decline in the previous session, with market participants closely monitoring peace talks regarding Russia's war in Ukraine and an upcoming decision on U.S. interest rates [1] Group 1 - Oil prices experienced a 2% drop in the previous session before stabilizing [1] - Market participants are focused on the ongoing peace talks aimed at resolving the conflict in Ukraine [1] - A decision regarding U.S. interest rates is anticipated, influencing market sentiment [1]

Summary of US Rates Outlook 2026 Fixed Income Industry Overview - The report focuses on the US rates market and the economic backdrop as it enters 2026, characterized by stalled inflation progress, uneven growth, and signs of labor market weakness [2][7][8]. Key Points and Arguments Economic Conditions - Economic growth in the US is more resilient than expected, potentially boosted by the One Big Beautiful Bill Act (OBBBA) and AI-driven capital expenditures [7]. - Consumer spending is mixed; higher-income consumers are driving spending while lower-income households face affordability challenges [7]. - Labor market indicators show a modest increase in unemployment and slowing nonfarm payroll growth, but the labor market has not collapsed [7][22]. Inflation and Interest Rates - Disinflation towards the Federal Open Market Committee's (FOMC) 2% inflation target has stalled, with both headline and core inflation measures remaining around 3% [7][29]. - The report forecasts 10-year Treasury yields at 4.30% by the end of 2026, higher than the Bloomberg consensus of 4.06% [2][8]. - The Fed is expected to maintain a neutral duration conviction, with potential for yields to rise due to dual-sided risks to policy [6][8]. Federal Reserve Dynamics - The conclusion of Jerome Powell's term as Fed Chair is a focal point, with potential personnel changes at the FOMC that could influence policy views [4][51]. - The Fed is likely to commence net asset purchases, particularly in T-bills, starting in Q1 2026 to mitigate funding pressures [4][65]. Treasury Supply and Demand - The Treasury's strategy of holding coupon issuance sizes steady is expected to continue through H1 2026, with maturity extension anticipated due to persistent deficit pressures [5][71]. - The report highlights that long-dated Treasuries may underperform swaps in the coming months due to supply and demand dynamics [5][89]. Yield Curve Scenarios - Four policy paths are outlined to frame potential rates outcomes: resilient growth with sticky inflation, inflation resurgence, moderate slowdown, and severe slowdown [3][35]. - The baseline scenario anticipates bear steepening of the yield curve, while an inflation resurgence could push 10-year yields to test 5% [10][39]. Risks and Market Positioning - The balance of risks skews towards further curve steepening, with optimal positioning suggested in the belly of the curve where structural risks are lower [3][46]. - The report cautions against long positions in the front-end due to negative carry and labor market concerns limiting hawkish repricing [9][46]. Additional Important Content - The report discusses the potential impact of the IEEPA tariff decision on fiscal deficits and the Treasury's reliance on T-bills for funding [81][84]. - It notes that the relative value of T-bills may decline as policy rates decrease, potentially shifting demand towards higher-returning risk assets [80][81]. - The report emphasizes the importance of monitoring repo market pressures and their implications for Treasury supply absorption [100]. This comprehensive analysis provides insights into the US rates outlook for 2026, highlighting key economic indicators, Federal Reserve dynamics, and potential investment strategies within the Treasury market.

Market Trends - Gold is on track for its fourth consecutive weekly gain [1] - Expectations of the Federal Reserve lowering US interest rates are supporting gold prices [1] - A weaker dollar is contributing to the rise in gold prices [1] Investment Flows - Inflows into bullion-backed exchange traded funds are aiding gold prices [1]

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the US rates market, highlighting a shift in near-term cut pricing from a hawkish to a dovish stance, with the market-implied terminal rate near post-Liberation Day lows [1][4][9]. Core Insights and Arguments - **Market Reassessment**: The abrupt reassessment of cut pricing is not viewed as an overshoot, as it remains modestly hawkish compared to economists' baseline projections of three cuts by year-end [1][9]. - **Recession Odds**: The current market pricing reflects a 30% probability of a recession within one year and a 40% probability over a two-year horizon, indicating heightened recession risks [8][11]. - **Labor Market and Inflation**: The materialization of downside risks in the labor market has not trivialized inflation risks, suggesting that the Federal Reserve (Fed) may find it easier to overlook temporary tariff-driven inflation boosts [9][19]. - **Curve Dynamics**: The report discusses the tendency of the yield curve to steepen prior to rate cuts, with historical data indicating that long-end steepening is a steady process while short-end steepening occurs closer to the first cut [15][18]. Additional Important Insights - **Term Premium Dynamics**: The report notes that the drivers of higher term premiums are likely to persist, influenced more by institutional credibility and debt sustainability concerns rather than cyclical dynamics [20][19]. - **Fed Leadership Impact**: Future perceptions of Fed leadership may influence market expectations regarding a more dovish path, although current market pricing does not reflect a clear expectation of accommodative Fed policy [24][19]. - **Investment Strategy**: The report suggests that the risk/reward profile favors remaining long on the front end of the US rates market, despite the market being less cheap than before [9][19]. Conclusion - The analysis indicates a complex interplay of factors affecting the US rates market, with significant implications for investment strategies and economic outlooks. The heightened recession risks and evolving Fed policies are critical considerations for investors [1][9][20].