Global Weekly Fixed Income Report
US Treasuries
Developments affecting perceived Federal Reserve independence are actively reshaping US Treasury term premium dynamics. The political maneuvering to install a dovish successor to Jerome Powell ahead of his May 2026 term expiry has injected a measurable "shadow Fed Chair" risk premium into the curve. This dynamic undermines dollar confidence at the institutional level, providing structural support to gold's safe-haven bid and capping emerging market risk appetite.
If Fed independence concerns intensify, the forward implication for Q2 is a violent bear steepening of the US curve, penalizing long-duration assets globally as term premiums continue to expand.
This bear steepening dynamic is not driven by traditional growth optimism or reflationary impulses, but rather by term premium expansion driven by persistent fiscal deficits and acute geopolitical concerns. The Adrian, Crump, and Moench (ACM) 10-year term premium currently sits at 0.81%, reflecting a clear demand for higher compensation to hold long-duration government
debt. The current curve shape signals that while the market expects the Fed to eventually cut short-term rates to satisfy political pressures, investors demand significantly higher risk premiums at the long end in an environment characterized by supply-side inflation, political interference in monetary policy, and unanchored deficit spending.
We expect 10-year and 30-year US Treasury yields to expand by 25 to 40 basis points over the next six weeks, driven by term premium expansion resulting from sticky energy inflation and institutional uncertainty surrounding the Federal Reserve transition. The specific market mispricing lies in the front end of the curve, which is overly anchored to the anticipation of 125-150 basis points of rate cuts in 2026 under a prospective Kevin Hassett-led Federal Reserve.
Convergence toward a higher terminal rate is anticipated by late Q2 as inflation data prints reflect the delayed pass-through of $105 Brent crude, forcing the market to price out premature easing expectations.
Base Case (60%): The Federal Reserve holds rates at the current 3.50%-3.75% target range through Q3 2026. Oil-driven inflation metrics prevent the dovish pivot anticipated by the futures market.
Yield targets place the 2Y at 3.85%, the 5Y at 4.10%, the 10Y at 4.50%, and the 30Y at 5.05%. The curve shape implication is continued bear steepening. Specific data thresholds that keep this scenario on track include core PCE remaining sticky above 2.8% and the ACM term premium sustaining above 0.80% as foreign demand for long-duration US debt wanes in the face of dollar
debasement fears.
Bear Case (40%): Fed independence shocks intensify alongside a prolonged Strait of Hormuz blockade. The term premium violently expands as the "shadow Fed Chair" narrative confirms a politicized central bank, driving severe bear steepening.
Key forward indicators include the 10Y vs 2Y spread (currently +52 basis points) , 10Y TIPS versus the neutral rate (currently 1.88%) , the ACM term premium level and direction (currently +0.81% and rising) , and the Fed funds futures implied path adjusting to the reality of delayed easing.
