US Treasuries got another leg of reprieve with 10Y yields dropping cleanly below support of 4.50%. There were several explanations for the rally in USTs. These include relief on the quarterly refunding (auctions sizes are likely to be kept on hold), weakness in the ISM figures as well as tariff worries heading into the backburner (no immediate key deadlines). Against this backdrop, duration fear has become less acute and this downward bias in yields may persist for a while. Beyond the coming few weeks, we think tariff threats will return and that may be accompanied by growth slowdown worries. Those could be triggers to drive 10Y yields towards 4.2%.
On a more structural note, Treasury Secretary's Bessent's interview sheds light on a few core priorities for the administration. First, TCJA extension should be seen as a base case. Second, increasing oil production is seen as a way to curb inflation. Third, the focus on borrowing costs is on the 10Y yield, not so much the FFR (in Bessent's view). Fourth, there is still a focus to bring the budget deficit down to 3% of GDP, from 6% currently. At this point, we reckon that curbing the budget deficit might be the most challenging as the increased shortfall in funds from TCJA extension would probably have to be made back via a combination of tariffs and spending cuts (it remains to be seen how effective DOGE will be). It is also not clear if Trump, who has previously pressured the Fed to lower rates, will accept that keeping the FFR high would actually help anchor 10Y yields. In short, we have not seen sufficient evidence that US fiscal profligacy is being addressed. This will prove to be a structural headwind for Treasuries even as we overlay with a tactical receive bias in the immediate term.
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