Global Fixed Income Report
The structural disconnect within the United States Treasury market lies in the systemic mispricing of the terminal federal funds rate relative to embedded inflation expectations, resilient consumer demand, and the looming spectre of fiscal dominance. During the week of April 13–17, the Treasury curve exhibited a pronounced bull steepening dynamic. The 1-year yield compressed from 3.70%
to 3.64%, the 2-year yield fell by 7 basis points to 3.71%, and the 10-year yield declined by 4 basis points to 4.26%, resulting in a 55-basis point positive slope on the 2s10s curve. Despite this downward shift in yields, the prevailing market narrative, which assumes that the April 17 Hormuz reopening will decisively crush energy-driven inflation and permit immediate Federal Reserve
easing, is fundamentally flawed. The underlying macroeconomic data reveals a significantly more hawkish reality. March United States Consumer Price Index (CPI) data jumped to 3.3% year-over-year, marking the highest level since May 2024. While headline inflation may experience a transitory dip due to the late-week retreat in crude oil prices, "super core" inflation remains highly elevated, demonstrating a three-month annualized rate exceeding 4.5%. Furthermore, owners' equivalent rent and core services continue to exhibit sticky year-over-year growth at 4.0% and 3.61%, respectively. In a base case reflationary environment, the combination of $175 billion in IEEPA tariff refunds, persistent domestic demand, and structurally tight labour markets prevents Core Personal
Consumption Expenditures (PCE) from returning to the Federal Reserve's 2.0% target in 2026. The Federal Reserve is forced into a prolonged pause, rendering the market's remaining rate cut expectations obsolete. The 10-year Treasury yield breaks aggressively upward through 4.50% by Q3 2026, driven entirely by a violent expansion in the ACM term premium rather than expectations of imminent rate hikes. The curve bear-steepens significantly. Strategic allocation would dictate a high-conviction core underweight to long-duration nominal United States Treasuries. Institutional portfolios should express a curve steepener bias, heavily favoring the 2-year over the 10-year and 30-year maturities. Furthermore, with the 10-year Treasury Inflation-Protected Securities (TIPS) yield settling at 1.88% , inflation breakevens remain an exceptionally cheap hedge against the forthcoming fiscal stimulus. The attribution of returns in the second half of 2026 will heavily favor TIPS over nominal bonds as headline inflation proves stickier and more resilient than the current consensus projects. Investors should actively short
the 10-year ACM term premium via derivatives, anticipating a normalization toward historical averages above 1.50%.
