US Rates Strategy_ Staying Long Duration While Raising UST Yield Forecasts

Summary of Key Points from the Conference Call Industry Overview - The focus is on the US Treasury market and interest rate strategy, particularly in the context of the Federal Reserve's monetary policy and economic outlook. Core Insights and Arguments - US Treasury Yield Forecasts: The forecast for the 10-year Treasury yield has been raised from 3.55% to 4.00% due to fewer and later expected rate cuts from the Federal Reserve, with risks skewed towards lower yields rather than higher [6][39][42]. - Investment Strategy: Investors are advised to maintain long positions in 5-year Treasury notes, avoiding duration-neutral yield-curve trades as neither steepeners nor flatteners appear attractive given recent economic data and Federal Open Market Committee (FOMC) rhetoric [6][39][41]. - Improper Payments: The Government Accountability Office (GAO) estimated that the US federal government made $236 billion in improper payments in FY23, highlighting potential areas for cost savings through government efficiency initiatives [14][21][31]. - Government Shutdown Risks: A government shutdown is anticipated on March 14 unless Congress passes necessary appropriations, with a looming 1% discretionary spending cut on April 30 [12][31]. - Debt Ceiling Increase: Discussions around increasing the debt ceiling may involve tying it to appropriations bills, which could require bipartisan support [10][11]. Additional Important Content - Inflation and Economic Growth: The core PCE inflation forecast for January is at 0.303% month-over-month, with investor focus shifting back to tariffs and fiscal deficits as inflation data stabilizes [9][45]. - Impact of Tariffs: The potential implementation of tariffs could lead to a 0.3% to 0.9% increase in headline PCE, while negatively impacting real GDP growth by 0.7% to 1.4% [53]. - Improper Payments Breakdown: In FY23, overpayments accounted for 74% of improper payments, with significant errors concentrated in Medicare, Medicaid, and pandemic-related assistance programs [26][27]. - Market Sentiment: There is a growing concern among investors regarding the Fed's ability to respond to economic slowdowns, which may lead to increased demand for long-duration assets [43][52]. Conclusion - The conference call provided a comprehensive overview of the current state of the US Treasury market, the implications of Federal Reserve policies, and the potential for government efficiency improvements. Investors are encouraged to adopt a long-duration strategy while being mindful of the risks associated with fiscal policy changes and economic growth forecasts.