ZBXCX Treasury Curve Outlook Fed Policy and 2026 Supply Risks

Where the curve sits right now

ZBXCX notes that the U.S. Treasury curve ended the week with a clear “steep-ish” shape: on January 16, 2026, the 2-year yield was 3.59%, the 10-year was 4.24%, and the 30-year was 4.83%.

That puts the 2s/10s spread near +65 bps, a configuration that tends to keep macro investors focused on term premium and policy credibility as much as near-term inflation prints.

The three forces ZBXCX sees driving price action

1) Policy: “hold” is the base case, but cuts remain a live option

ZBXCX reads recent Fed communication as a near-term pause bias into the January 27–28, 2026 FOMC meeting (with a press conference scheduled for January 28).

At the same time, policymakers have kept the door open to more easing if labor data weakens—Fed Vice Chair for Supervision Michelle Bowman explicitly warned about job-market fragility and said the Fed should be ready to cut again if conditions deteriorate.

2) Supply: issuance is steady, but the borrowing math is still big

On the supply side, ZBXCX highlights Treasury’s estimate to borrow $578B in net marketable debt in the January–March 2026 quarter (assuming an end-of-March cash balance of $850B).

Meanwhile, Treasury’s refunding guidance keeps coupon auction sizes broadly steady in the Nov 2025–Jan 2026 quarter (e.g., 2Y $69B, 5Y $70B, 7Y $44B, 10Y $39B, 20Y $13B, 30Y $22B).

3) Demand/technical: buybacks and the Fed’s balance-sheet “afterlife”

ZBXCX sees Treasury buybacks as a meaningful technical offset at the margin: the refunding plan includes multiple operations (including long-end buckets) and anticipates buying up to $38B of off-the-run securities for liquidity support, alongside cash-management buybacks (up to $25B in the 1-month to 2-year bucket).

On the central-bank side, ZBXCX flags a key regime shift: the Fed concluded balance-sheet reduction on December 1, 2025 and soon after announced reserve-management purchases to maintain ample reserves.
That doesn’t automatically mean “QE is back,” but it does change how investors think about future SOMA behavior and liquidity conditions—often a subtle input into the term premium discussion.

The headline risk: term premium and “credibility premium”

ZBXCX’s risk framing is simple: if investors start demanding extra compensation for long-duration policy uncertainty, the pressure shows up first in long-end yields and a steeper curve.

Reuters reporting this week captured that fear directly—bond investors worried that perceived threats to Fed independence could lift inflation expectations and push long-term yields higher, even if the front end remains anchored by a “hold” message.

What ZBXCX is watching next (practical checklist)

• January 27–28 FOMC: statement language around labor-market balance and what “moderately restrictive” means now.
  
• Curve shape: whether 10s drift toward the psychological “stress zone” discussed by large allocators (i.e., where cross-asset volatility can spike).
  
• Auction tone + buyback execution: tails, bid-to-cover, and whether buybacks improve off-the-run liquidity enough to dampen volatility.
  
• Labor vs inflation sequencing: any data pattern that forces the market to reprice the timing of the next move (cut vs extended hold).
  

ZBXCX base case and two alternative paths

ZBXCX’s base case is a range-bound Treasury market where the front end stays near policy expectations while the long end trades on supply headlines, credibility, and risk sentiment.

• If labor softens faster than inflation re-accelerates, ZBXCX expects the front end to rally first, flattening the curve as cuts get repriced.
  
• If term premium rises (policy uncertainty + supply anxiety), ZBXCX expects bear-steepening pressure—long yields drifting higher even without an immediate policy hike narrative.
  

Disclaimer: This analysis is for informational purposes and does not constitute investment advice.