Yield Curve

Valuation on Yield Curve (YIELD-CURVE) is stretched relative to sovereign debt yields, but short interest is too crowded to bet on immediate downside.

Credit spreads across related paper are tightening faster than equity multiples for YIELD-CURVE. High likelihood of institutional multiple re-rating if cash flows hold.

On our desk, the structural shift from a flattening curve to a bear steepener has completely altered how we evaluate equity risk. With the 10-year Treasury yield elevated by term premiums and fiscal supply concerns, the tolerance for valuation risk has compressed dramatically. We are actively advising our clients to rotate away from high-duration technology exposure and lean into quality and defensives like healthcare and energy, while carefully monitoring corporate refinancing risks highlighted by market leaders.

Analyzing the macro data from early 2026, the normalization of the 10-2 spread to around +50 to +54 bps and a NY Fed recession probability sitting near 25% indicate a moderate economic environment rather than an all-clear signal. However, we remain cautious about the underlying mechanics: unlike post-recession bull steepenings where short-end rates collapse, today's move is a bear steepener driven by long-end pressures. This leaves portfolios vulnerable if sticky inflation forces the Fed to pause its easing cycle while fiscal borrowing keeps back-end yields elevated.

From a portfolio construction standpoint, chasing duration has proven to be a fleeting strategy in this regime. Looking at the fixed-income landscape, we are positioning our strategies around ultra-short to intermediate-term maturities, utilizing instruments like Treasury floating rates to manage duration risk effectively. As long as the yield curve continues its path toward full steepening and money markets adjust to a 3.00% to 3.25% terminal fed funds target range, locking in yields across the 2-year to 10-year range remains our primary tactical directive.