The weekly dynamic of the US Treasury curve is part of a decline in nominal yields. The main deformation appears as a flattening, with the main driver of this move located in the intermediate and long maturities, while the very short end remains constrained by expectations for policy rates.
The observation of relative spreads between short maturities, the belly of the curve and the long end highlights an outperformance of the 5 year segment. The belly of the curve sees its yields decline more quickly than the extremes, increasing the overall convexity of the curve profile.
2Y to 10Y This segment drives the main flattening. The 10 year yield declines more than the 2 year yield, mechanically reducing the negative spread between these two maturities as a result of a revision of longer term economic expectations.
10Y to 30Y The decline in yields extends to the long end, leading to an adjustment of the term premium. The far end of the curve follows the easing move initiated by the intermediate segment.
The Fed stance is the fundamental trigger of this sequence. Faced with persistent inflation risk, the central bank maintains a restrictive communication, leaving open the probability of another rate hike or an extended period at punitive levels if price dynamics require it.
This narrative drives the repricing of monetary policy expectations which continues to structure the short end. SOFR futures fully incorporate this threat, acting as an inflexible anchor. This monetary anchor prevents the front end from fully participating in the general decline in yields, locking the starting point of the curve at a high level.
It is precisely this punitive level of rates generated by this monetary stance from the previous week that acted as the trigger for the current dynamic. Attracted by yields that have become extremely attractive, massive capital flows have moved into Treasuries, targeting both the front end and duration. This wave of buying creates a disconnect between money market rates, which remain high, and nominal sovereign yields, which compress under the weight of demand. The transmission reverses, the search for yield pushes sovereign asset valuation below the cost of cash funding.
In this context of declining nominal rates driven by buying flows, the reading of inflation through market derivatives acts as an accounting pivot. Analysis of inflation linked swaps and forward rates shows a marked resilience of longer term expectations, confirming the persistence of sticky underlying inflation which justifies Fed vigilance.
With inflation expectations remaining firm, the adjustment takes place directly through the synthetic real rate, which compresses mechanically in response to the fall in nominal yields. Inflation is no longer the accelerator of tightening but the stable component that confirms the shift in real financial conditions driven by the appetite for bonds.
The massive inflow of capital into sovereign assets creates a scarcity premium on the curve. Strong demand for government paper is reflected in a notable positive gap between SOFR secured funding rates and the 2 year Treasury yield. This technical disconnect illustrates the relative scarcity of sovereign collateral versus incoming flows, with investors accepting to hold sovereign assets at a marked negative premium relative to funding rates, confirming an allocation prioritizing yield capture and safety over very short term carry optimization.
This weekly configuration marks a logical and sequential inflection compared with the break observed last week. The shock of punitive real rates has fully played its role as a catalyst by acting as a magnet for international capital. Although these massive flows have compressed synthetic real rates from their recent peaks, they remain at sufficiently high absolute levels to stay highly competitive. These real rates continue to attract global savings, supporting demand for duration and locking in the flattening of the curve.
US Bond Market
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