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Slowdown fears in the US resurfaced with US Treasury yields down sharply across all tenors. The initially rally was driven by the Bank of Japan's inaction (against market pricing of further widening of the YCC) with yields following through lower after a couple weak data prints in the US. Notably, both retail sales (actual: -1.1% MoM sa, consensus: -0.9%) and PPI (actual: -0.5% MoM sa, consensus: -0.1%) came in weaker than the market expected and these two data points followed downward revisions for the preceding month. The upshot is that more data (excluding labour market prints) are pointing to a slowdown in economic activity and more muted price pressures. A downshift to a 25bps hike at the next FOMC meeting appears very likely. Moreover, doubts are emerging for tightening beyond that meeting as inflation concerns are giving way to growth worries.
We think that there is a fair amount of pessimism embedded in US yields, especially the longer end. 10Y UST yields closed below 3.40% for the first time since September as inflation expectations eased (10Y breakeven is hovering just above 2%). Meanwhile, the 2Y/10Y segment of the curve is still deeply inverted at around -70bps. There will probably be several shifts this year as the market oscillates between three key themes - recession, stagflation and Goldilocks. We are still in the steepening camp across the key segments (5Y/30Y and 2Y/10Y) this year. In level terms, we think 10Y yields look a tad low. However, a rise in longer term yields might require a clearly less hawkish Fed, greater confidence that China's reopening would help cushion the world economy and a flush out of UST short positions. Rapid bull steepening could also occur if a hardlanding takes place and the Fed gets forced to pivot quickly.
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