We see CY2026 as an year where thought the dated UST supply will reduce, the net duration supply will increase in USTs. This will lead to curve steepening. We expect the 2-30 spread to increase to 165 bps from the current 125 bps. This is happening because Treasury strategy is shifting toward T-bills, with net note/bond issuance falling about 25% y/y amid higher redemptions and renewed Fed purchases. We expect net issuance of notes/bonds to investors to fall to $1.2trn, from $1.7trn last year, with net T-bill issuance rising from $350bn to $700bn. On the investment grade issuance side, we expect 1.6 TN USD of gross issuance & .67 TN USD of net issuance. The increase in net supply is largely a non-financial story, and the biggest upside risk is AI hyperscaler capex. In the High yield space, we can expect .35 TN USD of gross supply. In the Leverage loan space, we can expect .5 TN USD of gross supply. To summarise, We see more of curve steepening due to net higher duration supply as well as elevated net IG supply. This implies pressure on yields to rise specially if future macro data does not support further rate cuts. We don’t expect any rate cut till May when Fed Chair Powell term ends. We still expect 2 cuts of 25 bps each in June & Sep. We have been bearish on 10yr UST since 9th Nov as below recommendation: https://macro-spectrum.com/trade-recommendation/sell-10yr-ust At the time of reco, the 10yr UST yield was at 4.09 and we are targeting 4.30 levels. On Friday it closed at 4.22%.
