International | 11:26 AM
Analysis of the US Treasuries yield curve by Weekly Market Reports shines an educated light on some of the key debates polarising market views and predictions in November.
- The market is pricing gridlock and lower Treasury supply more heavily than the risk of new spending
- High probability of a December Fed rate hike
- Markets might be unwinding from extreme fear reflex
- Credit markets are not pricing a severe AI funding squeeze
By Pete from Weekly Market Reports
Long-end relief is real but capped: stay short the front end, own the 2-7 year belly, and watch sentiment for confirmation.
The yield curve this week makes one thing clear: the market is not choosing between a hawkish Fed and a bond rally, it is pricing both at once.
The 2-year yield at 4.51% and the 10-year at 4.86% show a front end still anchored by policy expectations and a long end that has already moved a long way down from its early October peak.
This article takes the three debates the week’s coverage has produced, sets each camp’s argument against what the curve is actually doing, and then adds readings from our own Fear & Greed index, which we publish nowhere else.
We run some 200 news briefings a week and test each market theme against the US Treasury curve; that testing is what separates the verdicts below from the headlines.
1. Three debates, three verdicts
The first debate is whether the Democratic sweep in the midterms pushes rates down or up.
One camp, which includes strategists quoted by Business Insider and WallstreetCN, argues that a divided government means less fiscal spending and therefore lower yields. Allspring’s George Bory expects fiscal tightening in 2027 compared with 2026, with little chance of new fiscal stimulus, and notes that a shrinking deficit would be good for bond investors.
The opposing camp, represented by Columbia Threadneedle’s Gene Tannuzzo, argues that extra spending on Medicaid and CHIPS could steepen the curve and push long-term rates higher.
The curve’s verdict favours the first camp in the short term, with high conviction.
Over the last month the 10-year has fallen from 5.28% to 4.86% and the 30-year from 5.67% to 5.26%.
That is a decisive move in the long end, and it indicates the market is pricing gridlock and lower Treasury supply more heavily than the risk of new spending.
The second debate is whether the Federal Reserve is locked into a December hike or whether hike expectations are fading.
The first view, drawn from Yahoo Finance and Weiss Ratings coverage, holds that the 165,000 jobs gain and sticky inflation make a hike near-certain, with futures-implied odds of 70 to 80%.
The second view, drawn from Robin Brooks’s Substack and Business Insider, holds that a slowdown in AI and data-center activity could cool the economy and erase the hikes now priced in.
The curve favours the first view, again with high conviction. The 2-year yield fell 8 basis points over the past week, to 4.51%, a bigger weekly drop than the 10-year’s 5 basis points, but small beside the 42 basis points the 10-year has shed over the month.
Holding near 4.5% keeps the front end in a higher-for-longer pattern and gives little support to the dovish case.
The third debate is whether the AI trade is entering a funding squeeze and peak capital spending, or whether the recent selloff is an overdone chance to buy.
Citrini Research and Barclays Private Bank take the first view, pointing to heavy borrowing by the largest technology companies, which Magnificent Seven debt at $578 billion, up 45%.
UBS argues that the selloff has gone too far and that the investment cycle remains intact. The curve leans toward the first view, though with only moderate conviction.
Even after the relief rally, the 10-year to 30-year spread sits at +40 basis points, a wide premium that suggests the long end is still absorbing heavy corporate supply, consistent with AI-linked paper crowding out demand for Treasuries.
2. Exclusive: what our Fear & Greed index shows
These readings come from Weekly Market Reports’ own daily index of US equity sentiment and are published nowhere else.
On 7 November the index stood at 22 on its 0 to 100 scale, in extreme fear. A week earlier it read 26, in fear; a month earlier 45, neutral; and three months earlier 64, in greed.
Across the last seven days the average was 24, and every day was in fear. Over 30 days the average was 29.1, with 83% of days in fear and 17% neutral.
Over 90 days the average was 38.9, with 67% of days in fear, 21% neutral and 12% in greed.
The seven measures tell a consistent story. Market momentum, measured as the S&P 500 against its 125-day average, reads extreme fear today, at -2 on the scale, with a 30-day average of -1.07.
Stock price strength, the balance of NYSE stocks at 52-week highs against those at lows, reads fear today, at -1, with a 30-day average of -1.6.
Stock price breadth reads neutral today, at 0, against a 30-day average of -1.5. Put and call options read extreme fear today, at -2, with a 30-day average of -1.57. Market volatility, the VIX against its 50-day average, reads extreme fear today, at -2, with a 30-day average of -0.87.
Safe haven demand reads extreme fear today, at -2, with a 30-day average of -1.33. Junk bond demand reads fear today, at -1, with a 30-day average of -0.23, which is close to neutral.
The model’s central path points to 28, in fear, in seven days, with a range of 17 to 40. In fourteen days it points to 35, in fear, with a range of 23 to 47, and in thirty days to 31, in fear, with a range of
17 to 45.
The long cycle of about 114 days is rising from a trough, with its next turn in about 28 days. The mid-term cycle of about 28 days is also rising from a trough, with its next turn in about 2 days.
On the model’s track record, tested on 85 past forecasts, the average error is 5.3 points, against a typical daily move in the index of 3.8 points, so the forecast is useful for direction but not precise to the point.
Taken together, sentiment confirms the curve’s caution in the long end. Extreme fear in volatility, put-call positioning and safe-haven demand is consistent with investors still paying for protection and with a term premium that has not fully unwound.
It contradicts the curve only on breadth and junk bonds, where readings are neutral to mildly fearful, suggesting that credit markets are not pricing a funding squeeze as severe as the AI-supply thesis implies.
On the Fed question, sentiment offers no direct signal, so the curve’s verdict stands on its own data.
3. The edge
The analysis’s view of the curve favours a steepener rather than a clean long-duration bet.
The first point is to keep front-end duration short ahead of the 8 to 9 December FOMC meeting, because the 165,000 jobs print and 3.7% CPI make a hike close to locked in and the 2-year at 4.51% already reflects that.
The second point is to express the steepener through the 2-to-7-year belly, which looks relatively cheap against both the hike-anchored front end and the long end, where fiscal and AI-supply risks are still concentrated.
The third point is to lock in elevated yields, the 2-year near 4.5% and the 10-year around 4.85% to 4.90%, before a possible re-extension of the long end if deficit headlines return.
This follows directly from the verdicts: the front end is pinned by policy, the long end is capped by gridlock but not cured, and the belly sits between them.
The sentiment readings, with their fearful tone and their forecast of a modest recovery to the low 30s, do not contradict a position that protects against long-end volatility while staying short the front.
4. What would prove it wrong
For the midterm verdict, a renewed rise in the 10-year back toward the early October peak of 5.36%, or a sustained move in the 30-year above its recent 5.67% level, would show that new spending expectations are overwhelming gridlock relief.
For the Fed verdict, a sharp fall in the 2-year back below its recent levels, despite the hot jobs and CPI data, would indicate that hike odds are fading and the front end is no longer pinned.
For the AI verdict, a sustained compression of the 10-to-30-year spread from +40 basis points toward the lower end of its range would suggest that corporate supply is no longer crowding out
Treasuries.
For the edge itself, a reversal of the sentiment model’s forecast, with the index moving decisively out of fear into neutral or greed inside the seven-day window, would argue that the market is looking through the curve’s signals and that the steepener is being squeezed from the wrong side.
Pete writes for Weekly Market Reports, an independent macro research publisher; its weekly Yield Curve report is free at https://www.weeklymarketreport.com/yield-curve.
Re-published with permission. Views expressed are not by association FNArena’s.
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