Treasury Strategists Expect Lower Yields, Steeper Curve in 2023

Our projections are substantially above forwards over the next six months, and we are looking for higher peak rates than we have witnessed thus far in this cycle"

Reasons include: economy is likely to avoid a deep recession and inflation will be sticky, requiring restrictive policy for longer

Also, "notable shrinkage in central bank balance sheets" will result in "increased supply to the public and a reduction in excess liquidity"

Rates will likely be headed lower, though the move will require further labor market softening and may not occur until later in 2023," and risks to the outlook are more balanced

We expect the UST curve to dis-invert and move towards a positive slope"

A slowing economy, eventual Fed hiking pause, and lower vol should support UST demand," while net coupon supply to the public should decrease"

Yields should fall and the long end should steepen once the Fed goes on hold, consistent with previous cycles," expected in March at 4.75%-5%

Demand dynamics could remain challenging," however, as QT continues, foreign demand reflects muted reserve accumulation and unattractive valuations, and commercial banks experience modest deposit growth; pension and mutual demand should improve but not enough to fill the gap