Why the Market Is Still Mispricing the Terminal Rate

Forward curves continue to price a gradual descent back toward a terminal rate consistent with the prior decade's regime. That assumption did a lot of work in a world of shrinking deficits and disinflationary globalization; it does much less work today.

We think the neutral rate itself has moved, and that the market is treating this cycle's persistence as noise rather than as a signal about where policy actually has to settle.

Primary deficits at this stage of an expansion are historically unusual, and they change the neutral rate calculus by keeping term premium structurally elevated. Bond supply this large, absorbed by a shrinking base of price-insensitive buyers, tends to demand a higher clearing yield independent of the growth-inflation mix.

The mispricing we're describing is more visible in the relationship between the belly and long end of the curve than in the absolute level of short rates. That distinction matters for analyzing curve-shape risk as a separate question from duration risk, even though the two are often discussed together.

This is a framework for thinking about the risk, not a recommendation regarding any specific position, instrument, or portfolio. Readers should treat it as an analytical lens for evaluating fixed-income exposure, not as investment advice.