The US Treasury market if going through an interesting dynamic. One would have thought that after the Fed started cutting rates in September, the long end of the curve would have thrived. In fact, that was the narrative at the time: buy duration. Reality has been quite different. As you can see in the chart below, the red line shows the yield curve in September vs the blue line as of today. The yield curve has pivoted around 1 year rates, and as the short end of the curve collapsed by 100 bps, in line with Fed funds, the long end of the curve starting in the 2 year, shot up about the same amount, pushing mortgages higher and pressuring the equity risk premium along the way. Inflationary pressures, the growing (and out of control) budget deficit, and the need to extend durations by the US treasury into Notes and Bonds, are the forces behind the movement. The next moves by the new Treasurer will be incredibly important: keep the Treasury General account funded until Tax day (April 15th), keep the credit rating intact, fund the deficit, control liquidity and extend durations. All that, without letting the yields spike, and without scaring the credit markets.
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