Are markets tolerating the monetary medicine?

US Treasury yields may fall further in the near term, but balanced growth, inflation and geopolitical risks make neutral duration and strategic bond exposure the prudent stance.

• US Treasury yields fell by about 30 basis points or more across the curve in October, bringing the 10-year yield below 5.0% after a prolonged sell-off.
• The US economy grew at a 3.4% annualized quarterly rate in Q3, with nonresidential investment up 20.9%, a pace matched or exceeded in only 10 of the past 120 quarters, and consumer spending up 3.8%.
• Nominal GDP growth slowed to 5.6% from 8.5% in Q2 as the GDP price index fell from 6.1% to 2.3%, while high real and nominal yields relative to the past 25 years could attract further bond reallocation.
• Growth is expected to slow as the pace of AI-related capital expenditure and construction moderates, while political and regulatory restrictions could increase after the midterm elections.
• Renewed US-Iran conflict could drive oil and yield volatility; Brent crude is already up 55% year-to-date, although negotiations would limit the effect.
• The Fed is allowing markets to price two to three more hikes because inflation remains high, growth is strong and labor markets are stable, while the ECB has paused tightening and the Bank of Japan remains patient.

Takeaway: Investors should hold duration tactically at neutral while remaining strategically invested in bonds at today’s higher yields, because the risks of renewed selling and further yield declines are broadly symmetric.