Trading and Brokerage Excellence

FIXED INCOME STRATEGY BY CTI CAPITAL SECURITIES INC. ( Long term view) 

Bond yields are influenced by a wide range of factors, including bond supply, real economic growth, central bank policy, investor risk appetite, safe-haven demand, real yield competitiveness, and inflation expectations. While these factors can create significant short-term volatility, the long-term direction of government bond yields has historically been anchored by the prevailing trend in inflation. Core inflation expectations are shaped primarily by long-term inflation experiences rather than temporary fluctuations, causing bond yields to oscillate around a slowly evolving equilibrium level that reflects the underlying inflation environment. Our analysis indicates that the long-term inflation trend remains upward. As illustrated in Chart 1, the U.S. 10-year Treasury yield closely tracks a trailing five-year weighted average of consumer price inflation, adjusted for a term premium. Although yields may temporarily diverge from this relationship due to economic events, market sentiment, or policy developments, history suggests that they ultimately gravitate back toward their inflation-driven equilibrium. Given that the long-term inflation trend continues to rise, we believe upward pressure on the 10-year Treasury yield is likely to persist as the bond market gradually re-aligns with its fundamental equilibrium level.

FIXED INCOME STRATEGY BY CTI CAPITAL SECURITIES INC. ( Part 2 : Mid term view) 

Since 2023, both long-term inflation expectations and 10-year Treasury yields have largely moved sideways, reflecting a market that is currently trading close to its inflation-adjusted equilibrium. Historically, periods during which bond yields diverged materially from long-run inflation expectations were often followed by a reversion toward equilibrium. Today, however, that gap has largely disappeared. Long-term inflation expectations have stabilized near 3.5% while the 10-year Treasury yield has fluctuated within a relatively narrow range of approximately 4.0% to 4.5%. As a result, bond yields have remained range-bound, suggesting that the next major move in fixed income markets will be determined primarily by the future path of inflation rather than by Federal Reserve policy, fiscal deficits, economic growth, or temporary shifts in investor sentiment.

Looking ahead, our long-term inflation framework suggests that inflation trends over the next several years will be the dominant driver of bond yields. The current trailing 10-year weighted average inflation rate stands near 3.75%. Even if inflation were to average 4% annually over the next four years, long-term inflation expectations would remain below 4%, implying an equilibrium 10-year Treasury yield only modestly above 5%. Conversely, if inflation gradually returns toward the Federal Reserve’s 2% target, long-term inflation expectations could decline toward 2.5% by 2030, supporting a core bond yield closer to 3% and a reasonable trading range of approximately 2.25% to 3.75%. While inflation risks remain present, the combination of restrictive monetary conditions, subdued demographic growth, moderate economic expansion, and potentially lower energy costs suggests a higher probability of declining inflation pressures over the medium term. CTI Capital Securities Inc. will continue to closely monitor inflation dynamics and fixed income markets on behalf of our institutional investors and provide timely updates as conditions evolve.