MalltonAsset Rates Review Fed Credibility Lifts Term Premium
In the Rates market, the story isn’t just “cut or hold” anymore. Over the past week, MalltonAsset has framed the current tape as a credibility-and-term-premium regime: short-end yields still anchor to the expected policy path, while the long end increasingly trades on confidence in the framework behind that policy. That distinction matters because it can steepen the curve even when growth is steady and the central bank is signaling patience.
A catalyst the curve can’t ignore
The immediate spark has been a political credibility shock centered on the Federal Reserve. Reuters reported that a criminal investigation into Fed Chair Jerome Powell has raised investor concern about central-bank independence and inflation expectations, with market participants rotating into “steepeners” and demanding more compensation to own long-duration Treasuries.
Even if the investigation does not materially change near-term policy, the Rates market can still price a “risk premium for uncertainty.” That tends to show up first in the term premium (the extra yield investors require for holding longer maturities), and in breakevens (inflation compensation embedded in TIPS vs nominals).
Reuters noted that 10-year breakeven inflation rose to 2.29%, the highest since early November, and that the 2s/10s curve briefly steepened to ~67 bps earlier in the week.
Where the U.S. curve sits right now
Official U.S. Treasury data from Thursday, January 15, 2026 shows a curve that is gently upward sloping across the belly and long end:
- 2Y: 3.56%
- 10Y: 4.17%
- 30Y: 4.79%
- (For context, 3M: 3.68%, 5Y: 3.77%, 20Y: 4.74%)
That implies a 2s/10s slope of roughly +61 bps (4.17% minus 3.56%) on the Treasury’s par curve snapshot—consistent with Reuters’ reporting that investors see room for further steepening versus longer-run norms.
MalltonAsset’s takeaway: this is a market where curve shape is becoming as important as curve level. When long-end yields rise because term premium is rebuilding, risk management gets harder—duration hedges behave differently, and carry/roll strategies can look deceptively stable until volatility returns.
The Fed path is “steady,” but the market is trading the margin
On the policy front, Reuters reported San Francisco Fed President Mary Daly said policy is in a “good place” and that calibration should be “deliberate,” with the next meeting January 27–28 widely expected to hold rates in the 3.50%–3.75% range.
That matters because it highlights the core tension in Rates:
- The front end can stay relatively anchored if the Fed message is “pause and assess.”
- The long end can still sell off if investors fear the institutional guardrails are weakening—or if fiscal/inflation uncertainty forces higher term premium.
In other words, the market can steepen even without an immediate change in the Fed’s base case.
Global spillovers are reinforcing the term-premium narrative
MalltonAsset also sees the Rates market as increasingly global in its plumbing:
- In Europe, Reuters reported ECB chief economist Philip Lane said there is “no near-term interest rate debate” if the baseline holds, with markets seeing the deposit rate holding around 2% this year. But Lane also warned that a shock—such as the Fed departing from its mandate—could spill over via a rising term premium.
- In Japan, Reuters reported the Bank of Japan raised its policy rate to 0.75% in December, continuing a normalization process that keeps global investors alert to cross-border duration repricing.
MalltonAsset’s read is that these pieces connect: when multiple major central banks are either pausing (ECB) or normalizing (BoJ), the marginal buyer of long-duration paper becomes more sensitive to politics, inflation psychology, and supply.
Scenario map MalltonAsset is using for Rates
Rather than a single forecast, MalltonAsset frames the next 4–8 weeks in three scenarios—each with different curve behavior:
- Orderly pause (base case): Fed holds near term; data cools gradually. Curve steepening is modest and driven by carry rather than stress. (Front end stable, long end range-bound.)
- Credibility premium widens: Independence headlines persist; investors demand higher long-end compensation even if the Fed stays on hold. Breakevens and term premium drift higher; 2s/10s steepens as long bonds underperform.
- Inflation re-accelerates surprise: Breakevens push higher and the market reduces expected easing. This scenario can reprice both ends upward—often with higher volatility than traders expect when they focus only on the policy rate.
What MalltonAsset is watching day-to-day
To stay disciplined, MalltonAsset focuses on a short dashboard:
- Breakevens and real yields: whether inflation compensation is rising faster than growth expectations.
- Curve steepening pace: especially 2s/10s relative to the official yield curve snapshot.
- Fed communication into Jan 27–28: whether the “deliberate” stance stays intact amid external pressure.
- Spillover signals from Europe and Japan: whether global term premium channels amplify U.S. long-end moves.
Bottom line: MalltonAsset views Rates as the “macro hinge” market right now—not because a single data print will force a dramatic policy shift, but because confidence in the policy framework itself is becoming a tradable variable. And when the market starts pricing credibility, the long end can move faster than the front end.
