Morning Notes — Yield Curve Target

Yield Curve Target: The rally in 30-year Treasuries decelerated earlier this month as it approached 3.50% with momentum divergence, signaling a tactical mean reversion to resistance levels near 3.90%. Now at 3.75%, the long bond is approaching the top end of a bearish price cycle that began in late March on hotter inflation data.  The technical picture lines up with expectation for further cooling of inflation data into an ultimate Fed pause in May.  The recent steepening of the 2/10-year yield curve mostly reflects the tactical mean reversion in longer-dated yields and should not be considered as a positive economic signal. We look for 2/10 curve to flatten once a near-term tactical peak in longer dated yields is reached prior to calendar Q4 earnings season in mid-January. Eventual deep cuts to calendar 2023 earnings estimates should then drive demand for shorter-dated yields. Bond yields tend to peak 1-3 months before a Fed pivot with a 2-year target below ~3.40% and 10-year target below ~3.15% steepening the curve to -30bp from -58bp today. At that point, earnings and data will likely look terrible, but a narrowing of the 2/10 yield spread would signal a Fed pivot and an opportunity to add broad exposure to equities.