By John Li, Head of Asia Fixed Income and Credit Strategy, J.P. Morgan Private Bank.
Long-end pain, front-end gain
With 10-year and 30-year yields hitting multi-decade highs amid recent softer data, investors are questioning whether to extend duration. We believe these are levels at which investors could start moving out the curve. Our year-end target for the 10Y remains at 4.70; with yields now hitting that level, duration is becoming incrementally more attractive. To be clear, our view is for 10Y Treasuries to remain range-bound, with risks evenly balanced, but Treasuries make sense as a portfolio diversifier if economic data further surprises on the downside.
Overall, we’ve been recommending short-dated bonds in line with our view that the long-end would rise due to issuance, fiscal, and global concerns. Those concerns have not disappeared, but markets have moved in line with that view, making intermediate/longer duration Treasuries incrementally more attractive. While the front end remains our highest-conviction exposure across the curve, the intermediate segment is beginning to look attractive; supporting an optimistic but measured approach to adding 10y duration exposure.
Why is the curve steepening?
The key drivers, up to ~5 years, are dominated by fundamentals: economic data, Fed expectations, and the cyclical backdrop. Beyond ~5 years (and especially at 30 Y), the mix shifts materially toward term premium and broader forces that do not map cleanly to near-term Fed pricing, including supply/demand dynamics, fiscal projections, political/geopolitical risk, and global duration spillovers.
That framework shows up clearly in correlations. Historically, correlations between Fed policy expectations and UST yields are highest in the front end (2Y/5Y) and decline as you go out the curve (10Y lower; 30Y meaningfully lower). More recently, rolling 1‑year correlations have trended down, particularly further out the curve, which is exactly what you would expect when an increasing share of long-end moves are being driven by non-policy shocks rather than pure Fed repricing.
Geopolitical uncertainty, heavy AI-related issuance, and Japan’s long-end pressures are current examples of forces that can keep the long end elevated or volatile. Combined with expanding fiscal deficits, we don’t see term premium trending meaningfully downward anytime soon. Another way to think about the pressures on the long-end is the changing composition of buyers – as the primary buyer shifts towards price-sensitive private investors (instead of price insensitive foreign institutions), investors are demanding a higher yield.
That being said, a full-on recessionary scenario would certainly pull down the entire curve. While economic softness may continue, a full recession is not the base case. For the more risk-averse investor, longer-dated Treasuries beyond 5 years can make sense as a hedge to that downside tail, which we assign roughly ~25% odds of a full recession over the next 12–18 months.
Our View
The sell-off of long dated treasury highlights the ongoing challenges associated with ultra-long duration. Importantly, credit markets have remained orderly and continue to outperform Treasuries, despite the common concern that spreads are tight. As a rule of thumb, when the economy is holding up, we generally favor credit over duration. Overall bond yields remain attractive, and we continue to see a compelling case for fixed income within diversified portfolios.
