US Macro: Updated Duration Thoughts
Zachary Griffiths, CFA - Head of IG & Macro Strategy, CreditSights
Winnie Cisar - Global Head of Strategy, CreditSights
Brian Perez - Analyst, Credit Strategy, CreditSights
Kathleen Tang - Analyst, Strategy, CreditSights
26 February 2025
- As the 10y Treasury yield has moved below its 100 day moving average, we now view the risks to our call for a 4.75% 10y Treasury yield as clearly skewed to the downside. In early December (when we published our outlook), we viewed the risks to our call as fairly balanced. With this, we see the risk of credit spread widening increasing as recessionary concerns begin to outweigh inflation worries.
- Our analysis shows the 10y Treasury yield is more sensitive to changes in terminal rate expectations (3y1y OIS) on yield-down days relative to yield-up days year-to-date. This is a departure from the overall trend over the past several years during which the 10y was generally equally sensitive to moves up and down in terminal rate expectations.
- The recent move in yields appears to be driven by a modest repricing of expectations for rate cuts in 2025. While shifts in market sensitivity indicate to us growing concerns over growth, rather than inflation, we remain skeptical that the Fed will be inclined to deliver any rate cuts this year due to our projected path for inflation. This dynamic may only add to growth concerns further out the curve, increasing the odds the curve re-inverts this year.
The beta of 10y Treasury yield changes to changes in terminal rate expectations is 0.68 on yield-up days versus 0.85 on yield-down days. In other words, a 10 bp move up in terminal rate expectations implies a 6.8 bp increase in the 10y yield, while a 10 bp move down in terminal rate expectations implies an 8.5 bp decrease in the 10y yield. In our view, the market is displaying asymmetric risk to the downside on longer-term yields relative to the upside. This is clearly depicted in the chart below (left panel), as the beta for yield-up days downshifted to 0.68 so far in 2025 from 0.9 in 2024 as a whole. Of course there are far fewer data points in 2025 versus 2024, and we also note that yields have still risen on more days than they have fallen in 2025.
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