Bank Of America: 10s At The Edge Of A Regime Shift

Bank of America note that “the recent selloff is uncharacteristic of the typical late-cycle dynamics that generally favour duration overweights. Some of the idiosyncrasies of the current cycle may explain the decoupling with historical patterns and, to some extent, current fundamentals. Indeed, 10-Year Tsy yields at are approaching levels (~3.10-3.25%) that are consistent with a reset of ranges.”

• “The most-significant risk that seems to be expressed in the recent bearish dynamics is that of a change of regime on longer term inflation that drives a reset of ranges at the backend of the curve. The market seems to be assigning higher probabilities to this regime shift. We remain unconvinced of this thesis but, as we argued in recent publications, this is a risk well worth hedging in portfolios (we have favoured payer ladders at the front end and conditional steepeners in intermediate expiries).”
• “There was very little that was "normal" versus historical patterns in the current cycle so far, and we do not expect the late-cycle dynamics to buck this trend.”