We are turning bearish on US long end rates for following reasons: 1) The larger and faster de-escalation in US-China tariffs, which has trimmed the downside tail that we expected would be the potential catalyst to a broader move lower in US yields this year. 2) A later and slower baseline for Fed cuts 3) A still challenging (if less severely so) growth versus inflation trade-off. 4) The broader fiscal trend is the core reason for our bearish view on US yields. The combination of a smaller mechanical tariff headwind and a meaningful reversal in financial conditions from the early-April peak has trimmed the downside risk around growth. The less severe but still unresolved fundamental conflict between below-trend growth and above target inflation, diminished scope for near-term policy rate relief, and broader fiscal trajectory leave in place drivers that can see the reset higher in longer-term yields sustain. We see a nearly $6tn cumulative funding gap between FY26-29, which should necessitate multiple rounds of large-scale increases to coupon auction sizes beginning in February 2026. For all above reasons, we believe we might soon see a buyer’s strike in long end USTs in H2CY25. We expect to revisit the Jan’25 high of 4.85 & possibly 4.95% level of Sep’23. Trade Recommendation: SELL 10 YEAR UST (CURRENT YIELD 4.48), TARGET 4.85 & STOP LOSS 4.18.
