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US Fixed Income Market Summary: 12 January 2026

Core Content

The document provides an analysis of the US fixed income market, focusing on the outlook for interest rates, the impact of economic data, and the influence of structural and cyclical factors on the market.

Key Insights

1. Rate Cut Expectations and CPI Impact

• The rates market has priced in one rate cut relative to peak dovishness three months ago, but still expects more than two additional rate cuts.
• The upcoming core CPI print on 12 January 2026 is viewed as the last cyclical hope for the US front-end (short-term rates).
• An upside surprise in CPI could negatively impact the US front-end, especially given market positioning.

2. Structural Risks to Higher Equilibrium Rates

• Both tails of the AI (Artificial Intelligence) story pose structural downside risks to the view of higher equilibrium rates in the US.
• A potential AI bubble burst could lead to a more dovish Fed stance.
• Structural increases in inequality between capital and labor due to AI could also lead to lower equilibrium rates.

3. Fiscal Policy Shifts

• Fiscal dominance is expected to support the US front-end, but without the Fed introducing Yield Curve Control (YCC), it will likely affect long-end rates.
• The fiscal impulse is shifting from a headwind to a tailwind in 2026, with potential for further fiscal support and regulatory easing.
• The focus on affordability ahead of the midterm elections may increase the pressure for fiscal support.

4. Labour Market Stability

• The labour market appears to be stabilising around the breakeven rate.
• Jobless claims are not yet at levels that would trigger the Sahm rule, indicating no immediate recession risk.
• Non-farm payrolls are showing signs of stabilisation, with some potential for a turnaround.

5. Lending Standards and Monetary Policy

• Lending standards have been consistent with underlying growth around potential, suggesting monetary policy is close to neutral.
• The AI-driven capex boom has contributed to stronger growth than implied by lending standards.

6. Financial Conditions

• Financial condition indices are consistent with easy monetary policy.
• The Fed may need to maintain tighter policy due to regulatory easing and the potential for reduced need for rate cuts.

7. Inflation and Commodity Outlook

• Oil prices have shown resilience to recent geopolitical events.
• Reduced downside risks to oil prices are noted, with potential for China to increase strategic oil reserves.
• Upside risks to core goods inflation remain due to potential tariff passthrough.
• Downside risks to rental inflation are expected, with alternative rent indicators showing weakness.

Main Views

• The US front-end is vulnerable to an upside CPI surprise.
• Structural risks from AI and fiscal dominance may influence long-end rates.
• The Fed's monetary policy is likely to remain tight, with rate cuts still expected but limited by structural and fiscal factors.
• The market is cautiously bearish on US duration.

Key Figures and Data

• Figure 1: GDP trackers for Q4 have been revised up.
• Figure 2: Economists' expectations for 2026 GDP growth are trending upward.
• Figure 3: Jobless claims are not yet at levels to trigger a Sahm rule.
• Figure 4: Payrolls are stabilising around the breakeven rate.
• Figure 5: Tariff revenues are lower than advertised.
• Figure 6: Fiscal impulse is shifting from a headwind to a tailwind.
• Figure 7: Lending standards are consistent with underlying growth.
• Figure 8: Financial conditions are consistent with easy monetary policy.
• Figure 9: Leading indicators suggest some tariff passthrough.
• Figure 10: Alternative rent indicators show a soft trend.

Analysts and Contact Information

• Francis Yared: +44-20-754-54017
• Matthew Raskin: +1-212-250-1741
• Steven Zeng, CFA: +1-212-250-9373
• Andrew Fu: +1-212-250-1743
• Ioannis Sokos: +44-20-754-75680
• Markus Heider: +44-20-754-52167
• Soniya Sadeesh: +44-20-754-73091
• Gabriele Cozzi: +44-20-754-17714
• Mingyue Xin: +44-20-754-10002

Disclaimer and Risk Information

• The views expressed are the personal views of the analysts.
• The report is for informational purposes only and does not constitute investment advice.
• It does not take into account the individual investment objectives, financial situations, or needs of the recipient.
• Investments in fixed-income instruments are subject to macroeconomic risks, including inflation, fiscal policy changes, and FX fluctuations.
• Derivative transactions carry significant risks, including market, counterparty, and liquidity risks.
• Investors are encouraged to review the relevant disclosures and legal documents before making investment decisions.
• The report is not intended for distribution to the public in certain jurisdictions, including Taiwan and Qatar.
• Deutsche Bank may have conflicts of interest and is not acting as a financial adviser or consultant.

Conclusion

• The US fixed income market remains cautiously bearish on duration.
• The front-end is vulnerable to CPI surprises.
• Structural and fiscal factors are likely to influence long-end rates and the overall trajectory of the yield curve.