2026 US Rates Outlook: US Rates Research

Research evidence excerpt

2026 US Rates Outlook: US Rates Research

Key Themes

■We continue to forecast lower yields by year-end, but there is a lack of near-term bullish catalysts.

– Treasury yields are moving higher, not just due to inflation, but due to continued strong jobs data

• Market is likely pricing in a decline in the unemployment rate (UR) to justify pricing in two rate hikes.

We disagree with this pricing as a growth shock can come later

• Inflation shock helps skew risk for higher yields in the short-term.

– We like the 5y point for medium term long allocations.

• New Fed Chair Kevin Warsh may leverage seasonally weak jobs data in the summer to guide to future cuts or at a

minimum reduce the possibility for rate hikes.

– Favor steepeners in bullish moves.

• Buyers’ strike risks remain: fiscal/supply, globally weak demand for USTs and Fed uncertainty.

• Medium-term we think the pension fund bid for USTs could be limited as many funds have de-risked.

– Long-end inflation expectations still look underpriced.

• Inflation curve will likely steepen in coming months as near-term core expectations move lower.

■We are bullish front-end and belly swap spreads.

– The Fed has effectively removed tail risks via overly large Reserve Management Purchases (RMPs).

– In our view, the next narrative will be how can regulators reduce the demand for bank reserves.

• The Fed would need to see evidence that future policies are working before stopping RMPs and restarting QT.

• We see scope for ~$500bn reduction in reserve demand, which may act like a liquidity injection.

• Eventual clearing of standing repo operations will limit cheapness in forward spreads such as 3y2y.

YE 2026 forecasts

Source: Citi Research Estimates, Bloomberg. Note: Futures trading involves substantial risk of loss.