Market adjustments and yields: Fixed income markets have absorbed significant geopolitical and economic developments in recent months, particularly since the escalation of the Iran conflict. Treasury yields have risen sharply, reflecting a combination of higher growth expectations, elevated term premia, and a notable repricing of monetary policy.

Inflation and economic resilience: Yet this adjustment has occurred without a breakout in long-term inflation expectations or a collapse in economic data. This dynamic suggests that a substantial portion of potential bad news — higher-for-longer rates, persistent but contained inflation pressures, and geopolitical risk — may already be embedded in current pricing.

Fed policy and duration outlook: Investors appear to have recalibrated their views on the terminal rate for this cycle and the neutral fed funds rate, moving closer to more hawkish Federal Open Market Committee (FOMC) members’ perspectives. At the same time, stable inflation expectations give the Federal Reserve (Fed) the flexibility to remain on hold rather than react preemptively. This environment supports a cautious — but not outright bearish — outlook for duration, with yields likely past peak levels.

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