How Inflation and Fiscal Policy Are Driving US Treasury Markets

Recent CPI data suggests inflation remains the primary driver for Federal Reserve policy, as the labor market shows tepid growth that is not currently signaling a recession. While the bond market reacted positively to the latest inflation print, persistent fiscal challenges and heavy Treasury supply continue to exert upward pressure on term premiums. Mike Mitchell, Head of US Treasuries and Inflation Trading at Goldman Sachs, notes that while short-term investors face uncertainty regarding potential rate hikes, long-term investors may find current real yields in the 10-year and 30-year sectors historically attractive. Given these dynamics, a steepener trade remains the most compelling strategy, as the front end of the curve has already priced in likely Federal Reserve actions, while the back end remains vulnerable to ongoing fiscal and supply-related headwinds.