The price action in US Treasuries indicates that the bias to yields is to the downside in the short term. As noted previously, a tactical rally in USTs looked overdue. Moreover, we note that despite the pushback against a July cut from Fed Chair Powell during the semi-annual testimony, yields continued to leak lower. Market participants are probably focused on Powell’s acknowledgement that realized data supports the case for lower rates. By pinning the delay in rate cuts on tariff uncertainties, it throws up an interesting issue that policy settings right now may already be too tight. It might not be feasible to wait for the final full set of tariff policies (especially on the levels) to be announced, especially if changes are likely to be frequent. In which case, the Fed may not be able to afford being too behind the curve, probably justifying the two cuts in the dot plot despite a higher inflation outlook.
This set of market dynamics (lower yields, higher stocks and weaker USD) is reviving Goldilocks. Our short-term forecast of 4.2% for 10Y yield is well within sight and if there are signs that momentum may be firm enough to push yields towards 4%. We see this as a tactical rally amidst an extended period of high yields since the start of the year. However, we are less convinced that USTs should rally from a structural perspective given fiscal concerns. If the back end rallies too much, there would be opportunities to add to steepeners, which currently look a tad crowded.
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