US Bond Market Outlook

The sell of in the US bond market had a cyclical trigger

The market unwounded expectations of a fed easing as economic data has been stronger than expected.

Normally when the market is pricing in a less friendly Fed this leads to a bear flattening of the yield curve with short rates going up more than long rates.

However in this case we had a bear steepening of the yield curve.

Short rates went up on the back of stronger data and less expectation of a fed cut but longer rates have gone up even more.

This reflects a secular expectation that the conundrum will be reversed.

Foreign central banks will buy less bonds. Central bank reserves will be moved be into sovereign wealth funds, including equities. The case in China where they announced to invest into a private equity fund is one example. There is a recognition that foreign central banks will not always subsidise the belly of the curve.

The US economy is going to weaken from the Q2

1. Recession and property market recession is alive and well
2. Core inflation moves south of 2%

Therefore the next move of fed will be down

1. We are bullish on the front end of the yield curve.

2. Reflecting our believe that the term premium is coming back into the slope of the curve, we do not have anything fond to say on the long end of the curve.