US Treasury yields have been grinding lower over the past few weeks (10Y yields have dipped below 5%), and we wonder if the peak (at least for this year) may already be behind us. We have been tactically bullish over the past few weeks, noting that the price action in USTs in relation to firm data has shifted. While inflation data (PCE: 0.5% MoM sa in September) and activity data (GDP: 3.4% QoQ sa in 3Q) beat consensus, we note that yields still drifted lower by the end of the trading session. Clearly, the outlook matters more than data, which are viewed to be backward-looking. Amidst the AI wobble, the paring of growth expectations is reflected by lower implied real yields and the decline in the Nasdaq / S&P 500. We also note that credit spreads did not manage to tighten even as equity sentiment did stage some rebound.
With investors watching US mid-terms and the US-Iran war and taking a more realistic view of the AI-driven economy, some investor caution is warranted. Our current forecasts anticipate a fall in US yields generally over the coming two years as growth moderates. However, if investors are more worried about growth, the downshift in long-end yields would be pulled forward even if the Fed is still on a calibrated tightening cycle. We will be reviewing the USD rates forecasts in early December, keeping the outlook for 2027 in mind.
Forecast changes:
JPY Rates: We have nudged up our front-end rates forecasts slightly, anticipating an extended BOJ tightening cycle with a higher terminal rate of 2%. Given a more hawkish BOJ, we have also nudged down our long-end yield forecasts as inflation worries become more contained. 
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