Taking Stock of the Round Trip in US Treasuries

Our new Treasury yield decomposition shows the term premium did most of the work in the 10y Treasury round trip since early September, while higher rate expectations drove the sell-off over the past year. The rise in trend rate expectations points to a higher level at which rates settle over time. Fed policy pricing remains the most important input to a 10y forecast in our work; our new model shows whether its moves reflect expectations or premium. On our new model, the term premium played the largest role in the 10y round trip since early September, while ACM splits it about evenly with expectations. Term premium swings fade over several months, so the round trip likely says less about where 10y yields settle than the past year's rise in trend expectations. Cyclical rate expectations track the Fed policy stance and should fade as the cycle turns, making them the cleaner read on how much tightening the curve prices. Maintain long 2y (Sep 27) UST SOFR swap spreads at -5bp with a target