In December 2023 we published an FX Special Focus piece which served the double purpose of examining the market structure of USD at the time and presenting MI2’s investment process. We followed that up with a more detailed analysis of Japan. What was clear both then and now, was that the correlation between USDJPY and the interest rate differential has remained tight. This in turn has informed the long USDJPY carry trade which has been enthusiastically embraced by an increasingly large subset of the market.

We remain alert to the potential for the rate differential correlation to break down, but the research note below focusses specifically on the possible trajectory of US yields.


  • US growth dynamics remain stronger than many expected.
  • The Federal Reserve seem hell bent on cutting rates but are getting cold comfort from recent data releases, however they attempt to spin it.
  • Recent “off-message” comments from Fed officials underline that risk.
  • If we continue in this vein, expect US rates to ratchet higher and bonds to remain vulnerable.

US Treasury Yields Update


At the beginning of the year, the market was all in on the rate-cut bet. Yet, our work suggested that growth was about to reaccelerate with inflation remaining sticky. Thus, with 10-year yields just below 4%, it was a perfect setup to short Treasuries which we recommended both to our institutional client base and implemented in MI2 Macro Alpha for C8. Having achieved our initial 4.4% target, updating our thoughts regarding the trade now seems appropriate.

In terms of economic data, while there is always room for interpretation, on balance, our work suggests this is an economy where the porridge remains “too hot” and not “just right” as the Goldilocks crowd would have one believe. For example, even though last week’s ISM Services print was slightly weaker than expected, it remained in the expansion zone. Furthermore, the S&P US Service PMI offered a slightly more upbeat granularity in the sector and directly contradicted the decline in the Prices Paid Index. Quoting directly from ISM’s commentary on the data…

The US service sector remained in growth territory at the end of the opening quarter of the year as success in securing new business led companies to expand their output. Rates of expansion eased in both cases, however. Firms nevertheless continued to increase their staffing levels amid improved optimism about business prospects in the year ahead.”

“Both input costs and output prices increased sharply in March, often as a result of rising wages. In fact, the respective rates of inflation quickened to six- and eight-month highs to rise further above pre-pandemic averages”.

Elsewhere, as we’ve been expecting, ISM Manufacturing is finally back above 50. Even JOLTS data came in slightly better than expected, and assuming hyper-financialisation* is alive and well, it may be in the process of basing before moving higher.

*N.B. MI2 have a number of longer-term strategic themes around which we build our macro trading environment. Subscribers can get access to our core research where these structural themes are analysed in depth. The topics are: Deglobalisation, Oscillation (policy aggravated cycles), Correlation (reversion to a positive correlation between bonds and equities), Hyperfinancialisation (see below) and Fiscal Dominance (Debt and Dearth of Savings).

Next, while we aren’t fans of the headline ADP data, the survey does supply some interesting granular insights. For example, while their ADP job switcher/stayer data does not go as far back as far as the Atlanta Fed series, ADP is detecting a reacceleration in wage gains for job switchers, which could be an early sign that the job market is starting to retighten.

This more sanguine employment expectation was then further encouraged by Friday’s Non-Farm Payroll that came in well above consensus expectations of 220,000, printing a solid 303,000 alongside a marginal upward revision of 22,000 to the previous two monthly releases.

Moving to the charts, 4.4% is a significant level which still looms large even after the high payroll print. It is thus time for risk management. Our first observation is that courtesy of Q1’s choppy price action, all the moving averages have clustered around ~4.20%. As a result, this should now act as yield support and protection as you move your stops higher. The good news is that while the RSI has naturally risen, at ~60, it is still short of 70, which most recently has marked all the major yield highs.


That raises the question of whether you should press the trade, looking for 4.6% or even higher. At face value, this week’s powerful 20bps move suggests that the path of least resistance is higher. Given our entry level, we are staying short bonds with a trailing stop. However, if you are considering a new trade, we recommend waiting for our favourite Renko charts to flip. They suggest that the yield trend will move from bearish to bullish on a close above 4.42 with an initial target of 4.6% and beyond that as high as 5%!

P.S. Moving slightly further down the yield curve it seems the current pricing of the curve in 2025 and 2026 looks very rich if the FOMC now feels in anyway constrained in their easing programme. At the beginning of the year the market was pricing nearly 6 x 25bpts rate cuts. That is now down to 2 x 25bpts but 2025 is priced for a further 3 x 25bpts. Indeed, IF (a big one) the Fed does pull off a repeat of the productivity-induced soft-landing of the late 1990s, then their Opportunistic Disinflationary policy framework should preclude any more than a couple of rate tweaks. In that scenario, the whole belly of the US curve looks utterly mispriced. In that regard, the Renko chart suggests that on a close in 5-year yields above 4.5%, the next significant target would be 4.93%.


US Treasury yields are likely to remain under upward pressure as long as the data continues to surprise on the strong side. Activity data, employment and consumption are all currently robust. On 10th April we will get the next instalment of inflation data. While we rarely try to pick specific numbers, the likelihood of sticky inflation data over the next few months is supported by the strength of the data series analysed above. Our forward-looking modelling also points broadly in that direction.

In our macro investment process, we take account of more than just data prognoses. In addition to assessing policy frameworks in both Central Banking and fiscal circles, we examine positioning, flow of funds, consensus expectations, option pricing and other market-based indicators. We also have a blue-chip network of investment manager clients both in the real money sector and in the hedge fund space. These longstanding relationships help with forming our overall assessment of market opportunity and structure. Our collaboration with C8 is an example of the just such a network effect and the synergies for our clients and theirs is excellent.