The USD rates space is facing some tactical flattening pressures as investors mull oversold long-end rates and the prospect of a more hawkish Fed. 10Y to 30Y government bonds (especially USTs, JGBs and Gilts) have sold off significantly over the past two months and is experiencing a bit of a breather as month end approaches. We think that long-end to ultra long end JGBs are starting to look attractive once again as levels breach the highs seen in January. Moreover, Gilt investors got soothed by cooler-than-anticipated CPI figures. Auction dynamics were also unfavourable last week as investors remain wary of the 20Y auction amidst the global bond selloff. Taken together, there is likely to be some respite for the long-end of the UST curve in the near term.
By contrast, the frontend of the UST curve is now under upward pressure. Investors had anticipated that newly sworn-in Fed Chair Kevin Warsh would strike a more dovish note amidst pressure from Trump. Interestingly, Trump commented that Warsh can “do what he wants to do” on interest rates and market participants are taking this view of allowing Fed independence literally, for now. In any case, we think that the Fed will be largely independent and it would require clearly weaker data (economic activity or inflation) before rate cuts can be mooted. As investors grapple with the prospect of a hawkish Fed and upcoming auctions (2Y, 5Y and 7Y) this week, watch for short-term yields to push higher after a relief UST rally (assuming that the US-Iran deal comes into fruition).
Assumptions / Estimates of USD rates
Frontend – Fed hold at 3.75% to end-2027. Risk tilted to hikes.
Back end – 4-4.5% neutral
Long-term estimate for 10Y UST and 10Y OIS (2028-2030) – Under non-stressed, moderate economic growth conditions, 10Y UST yields likely between 3.5-4.5% (midpoint 4%) and 10Y SOFR OIS between 2.80-3.80% (midpoint 3.3%). 
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