USD Rates: Hawkish Jolt
Curve bear-flattened.
Group Research - Econs, Eugene Leow18 Jun 2026
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The US Treasuries curve bear flattened with the 2Y/10Y segment touching 30bps as investors mulled the prospect of rate hikes following the FOMC meeting. While the Fed kept rates unchanged as widely expected, the dot plot is hawkish (nine members saw the need for one or more hikes pushing the median projection to 3.8 for this year) and is consistent with the sizable increase in core PCE inflation projection to 3.3% (2.7% previously) and 2.5% (2.2% previously) for 2026 and 2027 respectively. Below, we lay out some observations.



First, forward guidance is greatly diminished, and this would mean larger term premium in the USD rates space going forward. Signs of this is already apparent from the much shorter FOMC statement and Warsh’s refusal to submit a projection in the dot plot.

Second, sweeping changes on how the Fed operates could be announced by the end of the year. Several task forces have been formed to examine communications, the balance sheet, data collection, AI/jobs/productivity and the inflation framework. These broadly echo some of his comments on a preference for less communication, a smaller Fed balance sheet and perhaps a tweak in the preferred measure of inflation (from the current core PCE to some form of trimmed mean inflation). These broadly point to steepening over the medium term.

Third, the market was not prepared for a hawkish Fed. The spike in frontend UST yields and the consequent risk off (lower stocks, stronger USD, lower commodity prices) was clear on this.

From a tactical perspective, the UST selloff offers opportunities. 2Y yields are close to 4.2% and we think these levels are tactically attractive again. Similarly, we think that risk-to-reward for steepening trades (2Y/10Y at 30bps) have become tactically compelling again.




Eugene Leow

Senior Rates Strategist - G3 & Asia
[email protected]



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