US Rates

The market voices at the moment seems in agreement that the FED is very close to the peak of its hiking cycle. Why then are yields at the back end of the curve so high? Surely investors would be buying at these yields to reduce reinvestment risk. There are many proposed reasons for this, some think structural changes supply line/protectionism/etc. could push yields even higher. Also, some central banks have reduced their balance sheets since the days of QE, so there might be an oversupply of credit. A reduction in demand from real money could also be a cause, where cover ratio's at auctions (Steve Major HSBC) have reduced.

In the below graph I show the Yield curve this month, last year and during 2007. At this moment, my US bond portfolio allocation (plotted on the graph) is very short in duration (2-3 years). But I do have a small portion (which will likely increase) in the longer dated tenors, bought at the lower prices of recent time. At this moment there are real yields in US government bonds, one cannot say the same for the UK - so my gilt exposure is reduced.

But what is also interesting is how the spreads for the different tenors have collapsed (see 2nd graph below). Add to this, the fact that the IG credit spread has all but disappeared at the same time and that shows the markets are not operating as usual.