Rates Outlook: The Bill Comes Due

The bond market is starting to assess that the bill is coming due. It is beginning to look at structural forces, such as extremely large deficits and sticky inflation. I covered those in detail in this demographics focused note: Sticky Forces.

It is also responding to cyclical factors, such as strong growth and easy financial conditions. Thus, we are noticing that recently when we get a data point that signals the Fed may not tighten, the bond market tends to reject rallies and reverse sharply. Thus, bond investors are starting to ask how much compensation is needed for all of these dynamics.

In this note, we are going to look at how to assess what is fair across different parts of the curve. I will present multiple fair value models for the 10y.

We are also going to look at curves, flies and carry to see where (if at all) there is attractive value in the U.S. interest markets. Over time, we will extend this analysis to global bond markets, which are also under pressure.