Market News

BY Sam Boughedda

Investing.com -- U.S. rates markets are heading into 2026 with an economic backdrop marked by “stalled progress towards 2% inflation, resilient but uneven growth, and emergent yet clouded signs of labor market weakness,” HSBC said in a new outlook.

After a strong year for Treasuries in 2025, the bank warned that the Federal Reserve’s ability to validate expectations for large cuts next year is “constrained by both structural and cyclical drivers.”

HSBC forecasts the 10-year Treasury yield at 4.30% by end-2026, notably above the Bloomberg consensus, and sees yields rising modestly to 4.40% by end-2027. The firm maintains a neutral duration view.

Mapping several policy scenarios, HSBC said a renewed inflation surge could push 10-year yields “to test 5%, particularly if monetary policy independence comes under question.”

Conversely, a softer growth path would likely produce “meaningful bull steepening of the curve.”

Overall, the bank sees the balance of risks as “asymmetric and skewed towards further curve steepening.”

It recommends positioning in the “belly” of the curve, where structural risks are lower and carry remains attractive.

Beyond Powell’s expected departure in mid-2026, HSBC noted that “several other personnel changes at the FOMC could also materialize,” adding uncertainty around policy direction.

The bank expects the Fed to begin “net asset purchases, concentrated in T-bills, from Q1 2026” to ease funding pressures as non-reserve liabilities expand.

On supply, HSBC believes Treasury coupon auction sizes will remain steady through the first half of 2026, but “maturity extension remains on the horizon,” with increases likely in Q4 amid large deficits.

The bank also argued that swap spreads fail to reflect these risks, creating scope for “long-dated Treasuries to underperform swaps in the coming months.”