08.28.2025
UST: Going neutral
We switch to a tactically NEUTRAL position
In our view, following the recent rally spurred by the Jackson Hole (JH) speech that turned out to be more dovish than expected, upside risks for UST yields have increased. This is due to the following reasons:
1) We remain of the view that the US economy will avoid recession this year. We expect economic momentum to pick up in Q4, after troughing in Q3.
2) A more dovish-than-expected Fed should help reinforce our fundamentally based growth baseline. A Fed seemingly more focused on growth than inflation reduces the risks that the economy will hit the wall.
3) We now expect the peak of tariffs’ pass-through to inflation to happen in October (previously expected during the summer).
4) Current Fed pricing is partly the result of political pressure on the Fed to cut. If political pressures on the Fed persist or even become successful, the build-up of term premium at the long maturities will likely continue, keeping the UST curve in a steepening mode. Even more so given still sound economic growth and slow tariff pass-through to inflation. In fact, the slower the pass-through, the longer the uncertainty regarding the new, post-tariff, price level equilibrium will last.
At the same time, we believe that the following factors could broadly offset upward pressure on UST yields in the near-term:
1) In July, the US Treasury announced that it will not increase coupon issuance, while it will increase the frequency of buybacks at the long end starting from Q3.
2) Tariff-related revenues could lead to a decline in the deficit in 2025 compared to 2024 and compared to investors’ expectations.
3) In aggregate, evidence on foreign demand for USTs remains relatively benign.
Against this backdrop, we now recommend increasing exposure only at 4.50-4.60% and turning SHORT at 3.80%.
Strategically, we remain CONSTRUCTIVE with a NEGATIVE outlook, as the medium-term outlook remains highly uncertain and heavily dependent on the policies of the Trump administration.
CHIARA CREMONESI
Senior Rates Strategist
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