Macro report · Chapter 09 of 10
The Bond Market
Complacent; not pricing the CPI re-acceleration.
| Instrument | Level | 6-mo chg |
|---|---|---|
| Fed funds | 3.63% | -0.09 |
| UST 2y | 4.17% | +0.01 |
| UST 10y | 4.48% | -0.02 |
| UST 30y | 4.97% | +0.03 |
| 10y-2y curve | +0.35% | +0.05 |
| Real 10y (DFII10) | 2.25% | -0.04 |
| HY credit spread | 2.75% | -0.01 |
Curve shape (10y-2y = +35bp): Dis-inverted and modestly, positively sloped — the post-inversion normalization. Here it steepens the benign way: the front end anchored (2y flat at 4.17%, Fed on hold) while the long end grinds up on term premium and supply. Consistent with Section 3's bear-steepener base case; the 30y at 4.97% approaching 5% is the fiscal-dominance premium in the long bond, near Gromen's ~4.8% affordability ceiling.
Real yields (2.25%): Historically restrictive — yet growth hasn't broken (IP and retail sales still accelerating). Resilience at high real rates is itself a reflation signature. If the Fed cuts into 4.3% headline for fiscal reasons, real yields fall and the debasement trade lights up.
HY credit spreads (275bp): Near cycle lows — risk appetite ON. Forward Guidance: "credit markets buoyant — HY spreads at lows, SpaceX $30B bond oversubscribed to $90B; boomer savings keep rates down" (forward_guidance-5h2MYi_SufA:90db20b78a). Zero credit stress; no recession priced.
What the bond market is pricing: A Fed on hawkish hold, no imminent recession, a slowly rising term premium. The Fed put is dead (Warsh has removed the risk-asset backstop), which structurally raises rate vol. The bond market is NOT pricing the CPI re-acceleration — that is the primary risk: a repricing higher in yields, especially the long end. Bessent's control of issuance/supply may matter more than 25-50bp Fed moves (forward_guidance-5h2MYi_SufA:81798f2aae).