The DM govvie space finally found some reprieve overnight with 10Y US yields closing at 2.83%. There was some nervousness over recent trading days as DM rates got caught in the selloff from Bunds. On an intraday basis, 10Y yields hit as high as 2.98% (above our 2Q forecast and neutral estimate of 2.80%) before retreating when European government bonds (EGB) rallied. We maintain that peak duration fear will be hit in this quarter. The reasoning is that inflation pressures will be acute, the Fed will deliver Jumbo-sized hikes and will also maintain the hawkish rhetoric. Subsequently, the Fed may downshift into a slower pace of tightening as the Fed’s estimate of neutral (around 2.5%) gets closer.
In terms of hike pricing and valuation, we think that US Treasuries are around fair value, reflecting a reasonable pace of hikes and factoring in sufficient term premium. While we were consistently in the pay on dips camp in the early part of the year, we think that the market is more two-way now.
Our call to fade the steepening in 2Y/10Y of the UST curve at 40bps on Tuesday (see here) played out, with the spread dropping back to 25bps. Our overall strategy for rates is broadly unchanged. We still prefer 2Y/10Y flatteners for DM curves in general (for the UST curve, we think 35-40bps would be another entry point). For the UST and SGS curves, we also like to receive 2Y/5Y/10Y fly, noting that there is too much premium baked into the 5Y tenors. For Asia, we are somewhat cautious as there may be more hawkish pivots to come (see here).
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