Our medium term views

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  The View

 The week that will be

  The main event next week may be the 40y JGB auction. We have seen a meaningful acceleration in the global bear steepening trend this week, driven by the US downgrade, Dutch pension reform amendments failing and the weak 20y JGB auction (Exhibit 4). Common drivers are supply, QT and lack of LDI demand. This is unlikely to change, but is a bigger issue, in our view, in the US and Japan, than the Euro Area and the UK (see Liquid Insight 21 May 25). We stick with steepeners and 30y spread shorts in the US, forward real yield longs in the UK vs the US and longs in 30y Gilts on ASW.

Beyond the ongoing fiscal discussion, the focus in the US will be on PCE and the FOMC Minutes. Our economists are looking for a benign 0.1% mom core print, but revisions create the risk of a 2.7% yoy number. We will also pay attention to personal spending given the continued divergence between soft and hard data for the US consumer.

In the Euro Area (EA) we will see yet more soft data, as well as the first national inflation prints for May. Our economists are looking for lower prints across the board as the Easter effect fades. We remain bullish EUR rates and bearish EUR breakevens vs the US.

Finally, we expect the RBNZ to cut rates by 25 bp, in line with consensus and market pricing (see New Zealand Watch 22 May 25).

The week that was

The week started with Moody's downgrade of the US. This brought attention back to US fiscal policy which is unlikely to deliver an improvement in the deficit (see Liquid Insight 18 May 25 and US Economic Viewpoint 20 May 25). It was followed by a very weak 20y JGB auction on Tuesday, failure of the Dutch pension reform amendment in parliament later that day, and a weakish 20y auction in the US on Wednesday. 30Y UST yields pushed above 5% to their highest levels since 2023, as previously indicated by our technical signals and patterns (Technicals).

Soft data - as expected - failed to send a clear signal with manufacturing benefitting from front-loading of orders and uncertainty seemingly weighing on services. The bigger surprise and market mover was the upside surprise in Canadian and UK inflation (see Canada Watch 20 May 2025 and UK Watch 21 May 2025). We see both BoC and BoE on hold in June and recommend paying June BoC OIS (see Rates Alpha 21 May 25).

The RBA cut rates as expected, however, the statement and press conference surprised on the dovish side: market pricing added more than one full cut for the remainder of 2025. We reiterate our Dec25-3y flattener (see Australia Watch 20 May 25).

  Rates - US

• Long-end selloff is top of mind for market & we think has room to persist
•  We maintain 10s30s steeper & 30y swap spread short

Bidless bond

The UST curve bear steepened as concerns around deficits & debt downgrade (see: US downgrade & US fiscal FAQ) met a sparse demand backdrop, particularly for the long end of the curve. Coming into the week, we flagged that prominent long positions moved out of the money and were vulnerable (see: Positioning lagging sentiment).

Our conviction across the curve remains strongest at the front and back end. In the front end, we hold our flatteners to position for fewer cuts this year and more next year (SFR Z5 - Z6) and we recommend paying July & December FOMC OIS. At the long end, we are in 10s30s steepeners and short 30y spreads. While market focus is squarely on the continued long end led selloff, we believe there is more room for this trade to perform (see US Volatility). US fiscal worries will likely accelerate as the House finalizes their bill & the Senate reduces the amount of spending cuts (see: No respite for the deficit).

Demand pullback from domestic investors

We believe end-user demand for the long end is limited for three core reasons: 1/ pension & LDI bid appears to be cooling for now, 2/ the back end offers less diversification benefit, 3/ the distorted 20y point limits rolldown for the 30y.

Slowing LDI demand: While defined benefit (DB) private pension funds remain well funded according to the Milliman Index, de-risking flow into fixed income appears to be slowing (see: Real money steepener). We see evidence of this in cooling demand for stripped USTs (effectively longest sovereign duration asset is principal only 30y coupon). The most recent Milliman annual report also suggests that while pensions were very well funded last year, they did not increase fixed income allocations.

Milliman 100 pensions have been adding to fixed income for nearly two decades while the broader DB private pension universe has been adding more to equities and re-risking (Exhibit 5). The recent long-end selloff may eventually present opportunities for flows from this investor, though present volatility may keep demand at bay.

Lower diversification: Long end USTs have exhibited worse diversification value vs other parts of the curve (Exhibit 6). As multi-asset investors leverage USTs for diversification vs risky assets, they may be less inclined to extend out to the long end. We see examples of this in fund flows, active Agg investor positioning, and CFTC asset manager futures holdings which all reflect a skew towards steepener positioning.

Poor roll characteristics: While the curve is now largely upward sloping, the 30y bond rolldown yield is extremely unattractive driven by the cheapness of the 20y sector. 10y20y vs 30y yield differential is historically stretched (Exhibit 7). UST's issuance at the 20y point is now likely cannibalizing demand for the long end at large.

Global investors have better options

As we have observed this week, bear steepening is a global phenomenon, not just a US story (see: Big bang bond steepening). We continue to believe though that the US curve will see more steepening pressure vs other global curves.

This is supported by the relative attractiveness of the long end of foreign curves vs the US on an FX hedged basis. For US & foreign FX hedged investors alike, USTs are far less attractive than other alternatives (Exhibit 8). This is particularly relevant now given how historically stretched theses differentials are and that global investors are likely more inclined to FX hedged duration risk (see: FX and Rates Sentiment Survey). While this may not result in outright selling of USTs, it argues for diversification out of USTs and into other markets over time (see: Global Rates Viewpoint).

August next opportunity for UST action

We believe immediate response from Fed & Treasury is unlikely near current yield levels. While we were hopeful that Treasury would act at the May refunding to support long-end market sentiment, the missed opportunity increased our conviction on long end shorts (see: Signal miss). The next steps from UST would involve reducing WAM of issuance and increasing long end buybacks. We do not expect any action from UST before the next refunding (July 30). Secretary Bessent remarks before then are unlikely to bolster market confidence without credible action.

A Fed response to support market confidence is also unlikely without broad scale deleveraging that causes disruptions in the funding market. Roberto Perli (SOMA portfolio manager) remarks on April events suggest that Fed is not concerned without a funding disruption. Even then, the first course of action would likely be to address funding markets vs QE style purchases that directly address the long end.

  Rates - EU

• Long-end steepening pressures are pronounced across developed markets driven by deficits, QT and reduced LDI demand. In EUR, the Dutch PF reform theme is picking up traction and weighs on the swaps curve, but 10y-30y Bund curve looks too steep.

We are seeing a pronounced steepening of yield curves across G10. Drivers are high government financing needs, shrinking central bank balance sheets, and less duration demand from liability driven investors (LDI). Pressures intensified since "Liberation day".

There are however nuances that make steepeners in some markets more attractive than in others. Historical cross-market dynamics point to the German and Japanese curves as having steepened too much (Exhibit 10). We would fade this elevated residual in the German curve relative to the US, but not that in the Japanese curve.

Dutch pension fund reform: one hurdle to the steepening was just lifted

The most significant structural change for the back end of the EUR curve is the Dutch pension funds moving from defined benefits to defined contributions by Jan-28. This move will ultimately reduce the pension funds' receiving needs in long-dated swaps, but near term we have argued that the momentum in 10s30s EUR swaps curve steepening could slow, partly due to a potential amendment to the reform delaying implementation (see: Liquid insight of Apr 1st). On Tuesday, however, this amendment was rejected in parliament, lifting one of the hurdles to the Dutch PF curve steepening theme.

Still, the timing and size of the unwinds remain uncertain. The absence of receiving in the 50y sector can indeed, on its own, support a continuation of the trend, but may be felt more in 20s50s and 30s50s than in 10s30s. We also believe this remains a theme better expressed in swaps than bonds. In fact, we believe it will ultimately lead to 30y European government bonds richening vs swaps, and outperforming 10y bonds on ASW.

Fiscal: limited increase in funding needs for defense

While the German fiscal shift represent a game changer for growth outlooks, we see limited impact on bond issuance needs over the next few quarters. We estimated that, without the use of any potential cash buffers, extra defence spending may lift German bond supply this year by around €18bn, through the re-introduction of 7y auctions from 3Q25 (details in Global Rates Weekly, 28-Mar). We will be able to update projections when the German cabinet submits the 2025 budget in June.

For the rest of the Euro Area, we also argued that defence spending should have very little impact on bond issuance needs this year (around €10bn). Beyond that, the need for fiscal restraint in the periphery and France will likely keep additional domestic issuance for new defence spending very limited in coming years too, with more done at EU level.

Overall, for the Euro Area in 2025, our expectations were for an implied a c.2% in gross bond supply due to extra defence spending, to €1.3trillion gross and €637bn net of coupons, redemptions, buybacks and ECB QT. Around 53% of that supply will have been completed by the end of this month, in line with the recent historical average.

We expect the maturity of EGB issuance to fall in the rest of the year. YTD, the portion of issuance conducted in the 10y+ part of the curve is significantly higher than typically levels for full calendar years (Exhibit 11). The front-loading of syndications could explain this (with most countries having completed all their syndication plans for the year - bar potentially Portugal & Finland). We also expect this to provide treasuries with more flexibility and allow them to react very dynamically to any reduction in demand in the back end of the curve, with auctions being more focused on shorter-dated bonds.

Demand: more positive outlook for EGBs

We are constructive on the demand outlook for EGBs (see Global Rates Viewpoint 20 May 25). At least three factors explain the surging interest in the theme of potential global re-allocation out of US bonds into European fixed income: (1) the surprising weakness in long-dated USTs (outright and vs Bunds) in the risk-off episode mid-April, (2) the sharp USD depreciation, (3) the narrative around reduced US policy predictability that could dampen demand for US assets.

We see four reasons supporting a reallocation towards European fixed income: 1/ a mean-variance portfolio optimization process suggest a rebalancing towards EGBs; 2/ attractive FX hedged pick-ups suggest support for the periphery in particular; 3/ domestic investors remain heavily underweight EUR fixed income relative to their pre-QE asset allocation; 4/ FX reserve demand is also likely to support demand for EGBs. In Exhibit 12 we summarize the approaches we presented in the Global Rates Viewpoint 20 May 25 to try and quantify potential flows into Euro area bonds.

   Rates - UK

• Pieces of a more constructive case for Gilts come together: currently, we are favouring receiving 10y10y UK real yields vs. the US and 30y Gilts on ASW.

  Pieces of a more constructive case for Gilts come together

Year-to-date, the bond yield and currency correlation has been weaker in the UK than in the Eurozone on average, indicating a weaker "safe-haven" aspect of Gilts relative to Bunds, we would say (Exhibit 13). Besides the locally driven volatility in January, 10y Gilts have also exhibited a higher beta to USTs more recently (Exhibit 14). Stronger discrepancies have also emerged between Gilt and UK equity correlations, with longer-maturity Gilts in particular offering less of a diversification benefit, not unlike in the US (Exhibit 3 & US bond outflows into EUR?, 20 May). Gilt curve distortions relative to fitted FV remain elevated, although largely we assign this to the favourable tax-treatment of low coupon Gilts rather than a sign of stressed liquidity conditions.

In any case, many challenges that the Gilt market faces can help explain these dynamics, as we have articulated in the past (see Choices under pressure. An ambitious UK Treasury has options to tame Gilts, 19 March), including:

• The pensions bid at journey's end: the defined benefit pensions liability has halved from £2tn at the peak, and the asset mix is now mostly bonds; the number of scheme members is falling (and they are aging) quickly; the hedging need is greatly diminished and the Gilt issuance pattern must adapt quickly.
• Rising, rather than falling, WAM of the national debt: the WAM of outstanding government securities has been falling gently for a few years. But that is not the national debt. QE was a liability swap, switching Gilts for reserves (with a WAM of zero). As QT unwinds that swap, it has been a force for WAM lengthening, eclipsing the impact of the shortening of Gilt issuance.

But lately, we have turned constructive UK rates, currently favouring receiving 10y10y UK real yields vs. the US (see When exorbitant privilege meets exorbitant need, 14 May) and 30y Gilts on ASW (see Rates-UK section of Deal or no ideal, 2 May):

• Receive 10y10y UKTi real yield vs. UST. Entry: 22bp pickup. Target: -40bp. Stop: 50bp. Current: 18bp. Risk: poorly digested long-dated Gilt supply.
• Long 30y Gilt on ASW (using UKT 4.375% 2054). Entry: 91bp. Target: 75bp. Stop: 100bp. Current: 95bp. Risk: re-emergence of UK fiscal worries.

Our reasoning is primarily based on three factors:

• Revised remit, revised thinking - the DMO has delivered… The DMO's unusual step of reshaping the Gilt programme significantly in April when the 2024-25 fiscal year outturn became known (so soon after the Remit was first set, in the Budget), was another welcome development. The WAM of Gilt issuance was cut further and we expect the DMO to continue managing Gilt issuance more proactively through the year.
• … now BoE to deliver next - QT slowdown theme into late summer. No active QT from October would imply a roughly 20% reduction in long Gilt sales from DMO and BoE combined relative to the current Remit and unchanged QT pace from October; as outlined in Finding the right balance (sheet), 16 May, we do not pick a base case scenario for QT for now. But the seemingly one-sided nature of the outcome (we would be shocked if the pace increased from October) aligns with our constructive stance on long-end Gilts on ASW.
• Improved IIP: The publication of the Q4 balance of payments details in March contained a radical revision. The net IIP shortfall for the previous quarter was revised from a shortfall of £837bn to one of £398bn, and the Q4 outturn reduced the deficit further to £280bn. At the stroke of a pen, something we had regarded as a material fragility for the UK economy and bond market was no longer the problem we had thought it was (Exhibit 16).

We would highlight some more tactical reasons for being constructive Gilts also:

• June and July are relatively heavy Gilt coupon payment months, with around 40% of coupons going to long-dated Gilts (37% of the coupons going to privately-held Gilts).
• With the UKT 2056 syndication out of the way, there is only one long Gilt auction remaining this quarter (UKT 2063 in early June) and one long Gilt programmatic tender (in late June). The DMO is not planning a long Gilt syndication in 3Q25.

The market may be warming up to this more positive narrative also: our most recent FXRS suggested Gilt duration exposure has risen both relative to core Europe and USTs lately (see Exhibit 17, I'm a dollar short, 9 May). And there are tentative signs that the 10s30s Gilt curve appears to have been more resilient to the global steepening pressures since April (see Exhibit 18, Big bang bond steepening, 21 May).

 Rates - AU

Dovish RBA cut

The Monetary Policy Board (MPB) cut the cash rate target by 25bps to 3.85% as was widely expected (see report: RBA review 20 May 2025). While most economists expected a 25bps cut (31/33 in Bloomberg survey, 2/33 expected 50bps cut) and it was fully priced by the market, the Governor noted the MPB considered a hold, 25bps, and 50bps cut, but 25bps was a 'confident cut'. The uncertain outlook and revised forecasts reinforce our view that the RBA will hold in July, with the next cut most likely in November, barring a significant growth shock or downside inflation surprise.

We anticipated a more hawkish cut…

  We anticipated a more hawkish message from the RBA. Governor Bullock leaned heavily into global risks which means that the front end is likely to rally aggressively if we get any policy-driven volatility in capital markets. The US President's announcement that tariffs will be set unilaterally by correspondence over the next few weeks means the risk is elevated. However, absent a major global shock, it is still difficult to conceive the RBA easing more than quarterly (i.e. after quarterly CPI data), which would mean two more cuts in August and November. Our economists see just one more (November).

… but RBA pricing is unlikely to be realised

With 40bps priced by August and more than 70bps priced by year end and, 2025 RBA dates continue to look too rich and levels look quite stretched. The RBA is likely to deliver at most no more than two cuts this year (our economists see just one more in November). The current state of play in trade (and fiscal) policy doesn't seem to justify overweighting downside risk scenarios for US and global growth and our US economists continue to see no more Fed cuts this year.

… and we still like selling Dec '25 vs 3y futures

We still recommend selling Dec '25 bill futures vs 3y bond futures (YM contract) because a lot of the 'dovish' commentary hinged on global risks, which we do not see as likely to materialise. We entered the trade at 21bps with a target of 8bps and a stop of 27bps (current level 24bps). The risk to the trade is another global risk-off event, which would likely see markets front-load cuts even more aggressively given the RBA's commentary.

Is it time to go long AU duration vs US?

The Aussie-US spread has come in quite a bit but that should keep tightening over time. We continue to forecast 10y ACGBs trading 75bps through USTs by year-end '26. Given divergence between the RBA's dovish signalling and the Fed's 'wait-and-see' approach, buying AU duration (i.e. 10y) on a cross-market basis now looks quite attractive, in our view.

We are still bullish semis: buy TCV Sep '39 vs 10y swaps

The implications of Victoria's budgets are mixed but spreads have tightened modestly. TCV's projected borrowing program has increased slightly following the Budget. However, Victoria's funding task will remain broadly stable around AUD 30bn, which is not the highest of the State Governments, and means the Australian Government will borrow more than the States over the forward estimates.

This is a substantial shift from the past few years, and we continue to see tighter semi-ACGB spread. We still recommend buying TCV 5.5% Sep 2039 bonds, paying 10y swap (entry 133bps, target 100bps, stop 148bps, current 135bps). On a fundamental basis, Victoria's positive exposure to rising consumption and a rebound in housing transaction volumes are bullish for TCV bonds. Risk: wider semi spreads in a risk-off event.

  Rates - AU & NZ

We forecast RBNZ to cut rates by 25bps to 3.25%

We expect the Reserve Bank of New Zealand (RBNZ) to cut the Official Cash Rate (OCR) by 25bp to 3.25% on May 28, in line with consensus and market pricing (Exhibit 19). The RBNZ is likely to signal further easing and revise down the projected OCR path, with global headwinds suggesting the OCR will fall below the RBNZ's estimated neutral level of ~3%. Risk is for a 50bps cut given we see a strong case for further easing.

Global growth headwinds support further easing..

Global trade developments and associated uncertainty imply lower growth and inflation in NZ, which we expect will lead to the RBNZ lowering the OCR to 2.5% in 4Q25. Global headwinds are expected to constrain the already subdued economic recovery, and we forecast below-potential growth of 0.7% in 2025 (see our report: Global trade headwinds, local growth risks). The overall impact on inflation is uncertain, but risks are skewed to the downside. We expect inflation to remain slightly above the middle of the RBNZ's 1-3% target band at 2.2% in 2025.

… domestic growth momentum remains fragile

Domestic growth remains weak and vulnerable to a shock. Retail trade transactions point to subdued consumption through to April, while consumer confidence remains pessimistic. Rising labour underutilization, surprisingly weak employment growth (-0.7% yoy in 1Q), falling hours worked and wage inflation at 2.6% in 1Q (from 3.0% in 4Q) all point to a soft labour market. While the unemployment rate surprisingly remained at 5.1% in 1Q, lower participation is doing the heavy lifting

Wider rate differentials = weaker NZD

Given broad pockets of illiquidity in NZ rates, we prefer to express our rates views in NZD. Some of the recent resilience in NZD likely reflects underweight positioning. Still, a sustained slowdown in global growth is likely to weigh on NZD, which has less terms of trade buffer compared to other commodity currencies.

 Rates - JP

• Domestic investors' JGB demand remains weak in FY25, but nonresidents aggressively buying on dips
• However, nonresidents could cut losses and lifers' use of reinsurance means their superlong demand is unlikely to increase. We therefore think JGB curve could continue steepening

Superlong demand still lacking

Despite the growing risk-off mood prompted by President Trump's announcement of "reciprocal" tariffs in early April, domestic investors' JGB purchases did not increase, and nonresidents were the largest buyers. Flow data also indicate that regional banks - among the key JGB investors thus far - are losing their appetite for JGBs.

We expect the JGB curve to continue steepening. In fact, 20yr JGB auction result on 20 May was very weak. We expect the surplus of superlong supply to persist given the potential for Japanese life insurers to increase their use of reinsurance and for nonresidents to cut losses, and the fact that the Ministry of Finance (MOF) is unlikely to reduce JGB issuance in the near term (for details, see Japan Rates Watch: What can BoJ/MOF do about steepening yield curve? 15 May 2025).

  Front end - US

•  We update our X-date and bill supply projections after marking to market our deficit forecast

Revised deficit forecasts => late Oct X-date

The U.S. fiscal deficit is in focus again as Congress considers a reconciliation bill that will boost the deficit (see: Fiscal policy: no respite for the deficit). While our economists' basecase deficit projections do not impact our expectations for coupon issuance near-term, the slightly lower deficit in 2025 does impact our bill supply and X-date projections which we detail below.

Our economists marked to market their FY '25 deficit forecast down from $2tn to $1.9tn and updated their monthly deficit projections, which we use as an input into our financing need estimates for the US Treasury. The lower deficit implies slightly lower bill supply and later X-date than prior projections (see: Debt limit FAQ & Funding notes: refunding & front end).

Our lower near-term deficit forecast pushes our X-date back to late October, from mid-October (Exhibit 22). However, we see Treasury's available measures getting uncomfortably low in late August, in line with Sec Bessent's recent letter to Congress. Given this guidance, we continue to expect Congress to pass a debt limit resolution in late July/early August.

Once the debt limit is resolved, we forecast Treasury will issue a $900b wave of bill supply to help rebuild the TGA (Exhibit 23). While we assume a relatively rapid rebuild of the TGA, our monthly bill projections are below the monthly net bill issuance we saw immediately after the latest debt limit episode in 2023, supported by the Sept corporate tax date. Still, we acknowledge risks are skewed to a slower TGA rebuild and a more drawn-out pace of bill supply growth. We do not expect this bill supply to be linear, typically the largest wave of bill supply is in the first couple months following a debt limit resolution and therefore expect bill supply growth to be front-loaded.

The debt limit resolution will likely also increase focus on fiscal policy and deficit growth if tied to a reconciliation bill. Congress is currently considering a debt limit resolution via a reconciliation bill which will likely extend expiring tax cuts and enact additional tax cuts with limited spending cuts (see: Fiscal policy: no respite for the deficit).

To keep pace with this deficit growth, we expect Treasury will need to start growing coupon supply to keep bills around 20% of marketable debt outstanding, in line with TMPG guidance. This would likely require Treasury to start growing coupon sizes in February '26. It is possible however that Treasury allows higher bill supply growth vs TBAC guidance, especially given concerns around cheapening pressure at the back-end of the curve and potential for stablecoin legislation to create structurally more demand for bills (see: Stablecoins & USTs). Higher bill supply would also help to bring down Treasury WAM, which is currently at historically elevated levels.

          Volatility - US

•   Balance of risks continues to support backend steepeners & vol on the right side of the grid. Key risk to this view = scenarios of belly driven selloff on positioning and/or Fed repricing. We like payer ladders in the belly as an overlay to steepeners.

 Balance of risks continues to support steepeners

Recession likelihoods faded in recent weeks. The market saw scope for two potential recession mechanisms: (1) a gradual slowdown (higher slowdown likelihoods - Exhibit 24) that eventually culminates in a recession (higher downturn likelihoods - akin to '07-08); and (2) an instantaneous negative shock, with tariffs as the likely catalyst, that tips the economy into a recession (akin to the '20 COVID shock).

The 90-day reprieve on tariffs (particularly with China), reduced the likelihoods of the latter materially. At the same time, negative momentum in macro data peaked mid-April and has faded since, with the past week finally showing a slight positive bias (Exhibit 25). The likelihoods for both mechanisms have therefore faded recently (see Exhibit 26 & Exhibit 27), allowing for a bear steepening dynamic in US yields (Exhibit 28).

The recent rates dynamic has likely been supported also by the progress in Congress of the "Big Beautiful Bill" and the recent US sovereign downgrade. The two drivers are related as Moody's action was justified by deteriorating US fiscal dynamics, which are likely to become worse with upcoming US tax cuts (see US downgrade & US fiscal FAQ from 19 May '25). Our US economists have long expected the US annual fiscal deficit to deteriorate to 7% / GDP in FY '26 & '27 (this is far from Treasury Secretary Bessent's stated annual deficit objective of 3% / GDP). Both drivers may continue to support a near-term bear steepening bias, particularly at the backend, and vol at the right side of the grid (see Exhibit 29), even as near term uncertainty fades (see Exhibit 30).

Positioning bias

We favor breaking down recommendations between: Level 0 positions that reflect our duration conviction and are expressed in linear space; Level 1 positions that hedge the key risks to the Level 0 bias structurally; and Level 2 positions that include tail hedges and more tactical positions.

In the Level 0, we are cautious on dip buying at least until 10yT levels c.4.75% with expansion likelihoods priced at c.75-80% or above. In any dip buying, however, we continue to favor a mix between nominals and reals, to protect portfolios for stagflation risks (see Who's afraid of a little stagflation from 15 May '25).

In the Level 1, we continue to favor hedging portfolios for bear steepening risks though: (1) 1y fwd 5s30s conditional bear steepeners (currently +34bp, risk = bear flattening dynamic): (2) 10s30s steepeners (currently +6bp, risk = flattening dynamic); and (3) short 30y spreads (currently +1bp, risk = UST outperformance). We see these positions as long vol proxies' medium term)

In the Level 2, we continue to favor: (1) paying the Jul & Dec Fed meetings; and (2) 2s10s flatteners expressed through costless 2s10s floor ladders (see Deal or no ideal from 2 May '25). We see both positions as short vol proxies near-term.

Some of our structural hedges are exposed to scenarios where the belly leads the underperformance on the curve, driven potentially by positioning and/or the pricing of an on-hold for longer Fed. Both could drive 2y1y & 3y1y OIS rates back to c.4-4.25% levels (recent peak) & potentially an underperformance of the belly vs the wings.

To hedge these types of scenarios, we continue to favor costless payer ladders in the belly with downside breakevens above the o/n policy rate. We think it is attractive to sell the upside beyond the downside breakeven on these positions because we see the threshold for Fed policy tightening near-term relatively Costless 6m5y payer ladders (currently +4bp, risk = selloff beyond the downside breakeven with potentially unlimited downside) have indicative strikes currently atm/atm+27bp/atm+54bp, a maximum upside of 27bp in the c.3.99-4.26% range & a downside breakeven at c.4.53% (20bp above the o/n rate).

   Technicals

•  Upside for US yields materialized this week, in line with our signals and patterns discussed over the last few weeks (See: Deals for yields 14 May 2025).
• The US 30Y yield rose above the 5.02% level and came close to our 5.17% target. On Thursday, it reached an intra-session high of 5.15%.
• The candle pattern formed on Thursday suggest the market is hesitating to push yield higher. While trend bias is still up, the longer yield remains below the Oct-2023 highs, the greater the potential for a double top in the larger cycle becomes.

US30Y Yield flirts with 2023 highs

Intraday market actions this week pushed US 30Y yield near the head and shoulders target of 5.17% (high as of Thursday was 5.15%). This is right near the Oct 2023 highs and a precarious point. Could the long-term cycle be developing a double top? Or just a brief hesitation before the next leg higher to 5.33% follows? Our trend and momentum indicators still have an upward bias; however, the longer yield remains below the Oct 2023 highs, the greater the potential for a large double top is to form.

 Rates Alpha trade recommendations