Rates Spark: Quiz Time
- 17 February 2026
- Rates Spark
Question: Average US 10yr yield in the past year? Answer: 4.2%. Average 10yr yield in the past 3 years? Also 4.2%. Now, what average should we expect for the year ahead? The starting point today is 4.05%. There is a macro vulnerability narrative calling for a break below 4%. Maybe. But we like the 4.2% averaging tendency, so, in the end, we're going back up
Here's how we view the curve now and in the period ahead
Essentially, the 10yr yield has been up and down in the past few years, briefly above 4.5% at times, and below 4% more often, but by and large has not shown a tendency to radically change its averaging at or about around 4.2%. And that, by the way, is at or about the neutral tendency that we identify for the 10yr Treasury yield. In other words, if the funds rate was close to neutral and inflation close to neutral, we should expect the 10yr yield to be around neutral too.
Currently, we have a funds rate at 3.64%, just a tad tight versus neutrality. But the market is discounting a return to neutrality over the course of 2026, which helps to pitch the 2yr yield at 3.3%. The totality of circumstances on the front end generally smacks of neutrality. And inflation? We saw that printing at or about 2.5% last week. And inflation expectations tend to be in that territory too (or slightly below for longer tenors). That's all consistent with this notion of neutrality when it comes to pitching where the 10yr yield should be.
What about bond supply, and the fiscal deficit? Two things. First, the market does not seem to care. Second, the effect on longer tenors is being curtailed through reliance on heavier short-tenor issuance. What about Kevin Warsh's ambition to reduce the balance sheet? If true, it must mean the Fed holds less and the market then needs to hold more. That adds to the weight-of-supply story. There is an offset coming, however, from the 1 April loosening in the leverage ratio requirements for the large US banks, which should allow them to hold more Treasuries (should they choose to do so). Overall, the theme here is mixed to bearish, but far from determinative.
And what about the slowdown risk for the US economy? This is such an interesting debate. There is a significant expectation for relatively poor macro circumstances ahead. But not poor enough, it seems, to push the funds rate expectation structurally and materially below 3%. But if that is true, why the predominant expectation for macro weakness? The market discount is telling us that things are quite nuanced. We're left with the impression that the 10yr can very easily hot-tail back to where it came from in the 4.2% area, unless we hear or know more.
Wednesday’s events and market view
After a slow start, the US data calendar is getting busier with the release of the durable goods orders, housing start numbers and industrial production data – the consensus is looking for steady numbers. The FOMC minutes of the January meeting could be more interesting since the Fed displayed a more hawkish tinge. The minutes could reveal to what extent this was more aimed at stemming the dollar weakness at that point in time. The Fed’s Bowman is slated to speak at a supervision and regulation-themed event.
There are no releases of note from the eurozone with only France releasing final CPI data for January. Of more interest will be the speeches of the ECB's Villeroy, Cipollone and Schnabel – the latter speaking on sovereign debt levels.
In primary markets, Germany will sell €5.5bn in 10y Bunds while the US Treasury will sell US$16bn in new 20y bonds.
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