Barclays_US_Rates_Research_A_New_Fiscal_Narrative

This document is intended for institutional investors and is not subject to all of theindependence and disclosure standards applicable to debt research reports prepared for retailinvestors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for itsown account and on a discretionary basis on behalf of certain clients. Such trading interestsmay be contrary to the recommendations offered in this report.Please see analyst certifications and important disclosures beginning on page 15.US Rates ResearchA New Fiscal NarrativeHigh tariff revenues and the start of a meaningful Fed easingcycle, alongside a somewhat balanced economy, havematerially improved the fiscal outlook. We remain of the viewthat markets have yet to fully reflect this fiscal shift andmaintain our expectation for 30y yields to decline to 4.5%.Key TakeawaysResilience of the US long end: Despite widespread worries following the passage of the OneBig Beautiful Bill Act (OBBBA), the US Treasury market has been notably resilient (Figure 1). Inmid-May, we argued that investor pessimism about the long end was overstated. Since then, 30yTreasury yields have declined meaningfully, even as yields have risen elsewhere. We believemarkets have yet to internalize the fiscal developments and expect 30y yields to decline further,to 4.5%.Improved debt trajectory: A combination of higher tariff revenues and lower issuance-weighted Treasury yields has materially improved the debt outlook. Current fiscal and monetarypolicy outlooks suggest budget deficits are likely to dip to 5.5-6.0% of GDP, while many hadexpected a rise to 7-8%. The 10y forward debt/GDP ratio is close to 116%, compared with the130% that was looking likely earlier this year. This is roughly in line with the CBO's January 2025baseline, which assumed the expiration of all Tax Cuts and Jobs Act (TCJA) tax cuts.Trade policy: Trade policy is exerting a significant influence on the fiscal profile. Customs dutieshave surged to $30bn/month and are poised to rise further as the effective tariff rate climbsfrom the current 11%. This could generate up to $300bn in additional annual tax receipts. Evenwith the OBBBA in place and before accounting for the year-to-date decline in intermediateyields, the 10y forward debt/GDP ratio would be closer to 123%, versus 130% if only TCJA cutswere extended.Interest rate dynamics: Interest rates are playing a pivotal role in shaping the debt trajectory.T-bill yields, which account for 20-25% of outstanding debt, are priced to decline to about 3%within a year, versus prior expectations that they would stabilize at 4%. Issuance-weightedaverage yields on notes and bonds have declined from 4.5% to 3.8%, despite the economylargely expected to end up in a similar place. These revised assumptions further support a 10yforward debt/GDP ratio of 116%.Issuance outlook: We expect the Treasury to continue to increase the proportion of T-bills in itsissuance mix, while keeping sizes of notes/bonds