US Treasuries: Bear flattening as markets price more hikes – TD Securities

TD Securities notes that the US Treasuries bear flattened significantly following stronger Consumer Price Index (CPI) data and hawkish remarks from Governor Waller, which led investors to anticipate further Federal Reserve (Fed) tightening. The yields at the front of the curve rose, breakevens expanded, and the bank warns that highly negative breakeven carry in early 2027 could pose a challenge for the inflation-linked asset class.

The bank's analysis indicates that the flattening of the yield curve could be a headwind for the inflation-linked asset class in 2027. Market participants have reacted positively to Governor Waller's comments, which suggested the potential need for an additional 50 basis point (bp) hike, raising the forecast for hikes in December to 28bp from 25bp, and increasing the forecast for hikes in 2027 to 45bp from 34bp.

The front-end of the curve has been pushed sharply higher, leading to a flattening of the yield curve and wider breakeven yields (BEs). Investors are now waiting for further guidance from the Federal Open Market Committee (FOMC) to determine whether other members agree with Waller's assessment before pushing the December pricing higher.