When we started the year CY25, it looked like UST yields were headed for a large rout compared to G7 peers. Fiscal worries, fed independence, policy flipflops were the buzzword for selling USTs. But mid-way down the year, USTs are now outperforming most of the G7 peers. Both in the 10yr and 30yr space, USTs have outperformed German bonds, UK Gilts, French OATS and JGBs. We believe US fiscal worries are looking less troublesome considering 20-25 BN USD per month tariff revenues. Also Fed might be forced to cut fast to neutral rate level of 3% by March 2026 as employment mandate takes precedence over it’s price stability mandate. Despite concerns over Fed independence and fiscal pressures, US bond markets remain relatively stable, with the US viewed as a safe haven and the "best house in a crumbling neighbourhood". Against the backdrop of turmoil in other debt markets and an overhang of fiscal and economic pressures, the US bond markets might continue to stand out as remarkably stable. We also believe that current US administration stated goal is to bring US rates lower. Hence treasury secretary Bessent might ensure through low duration supply & higher tbill supply that USTs remain well behaved. He has jaw boned on all occasions US yields were rising and he has been till date efficient in this approach. On the other hand, Germany’s stated goal of increasing fiscal to fund defence expenditure is well known and hence the rise in bund yields. Also what is more problematic is the consistent French government stability issues & UK debt worries. In Japan political uncertainty, a reluctant BOJ, sustained high inflation are leading to sustained high JGB yields. Without a move from Japanese lifers bringing back their investments in to JGBs we don’t see a way out of current up trend in JGB yields. For all above reasons we remain bullish on long end USTs against long end G7 peers. Currently the spread between 10yr UST & 10yr bunds is 142 bps. We believe this spread might be ticking down to sub 100 levels sooner than later. Europe fiscal expansion, defence spending, political issues in France etc are multiple headwinds for bund yields. On the other hand, forthcoming rate cuts in US, a favourable duration supply from US treasury and a likely reduction in QT further as bank reserves go down will enable USTs to outperform it’s G7 peers at least till Q1CY26. The risk to our view if US supreme court overturns Trump’s tariffs in which case tariff revenue disappears, US growth turns solid with less scope for rate cuts.
