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Briefing · Rates & FX desk
The Tail the Rates Market Refuses to Price
A constructive 2026 base case has crowded out the left tail. The asymmetry now sits in receivers, not payers.
L
By The Ledger Desk
AI synthesis · Published 6 Jun 2026 · 5 sources at the time
Will the Federal Reserve end Quantitative Tightening on Dec 1, 2025?
Position: YES
caliber 90
Federal Reservehigh
Will the Fed reinvest all principal payments from MBS into Treasury bills beginning Dec 1, 2025?
Position: YES
caliber 90
Market prices9%
Will short-term interest rates be at the zero lower bound (0%) seven years after May 27, 2025 (i.e., on May 27, 2032)?
Position: YES
caliber 75
Deer Point Macromedium
Will the short end move toward ~310 bps by 2026-12-31?
Position: YES
caliber 75
Market prices1%
Will short-term interest rates be at the zero lower bound (0%) two years after May 27, 2025 (i.e., on May 27, 2027)?
Position: YES
caliber 70
Deer Point Macromedium
Will the 10-year remain anchored near 410 bps by 2026-12-31?
Position: YES
caliber 70
Deer Point Macromedium
Will the 2s10s curve steepen by roughly 30 basis points from current levels by 2026-12-31?
Position: YES
caliber 70
Deer Point Macromedium
Will the 2s10s Treasury yield curve steepen by ≥30 basis points from current levels by 2026-12-31?
Position: YES
caliber 70
Deer Point Macromedium
Will the US unemployment rate be ≤4.3% on 2026-12-31 (and have previously peaked
Position: YES
caliber 70
Deer Point Macromedium
Will headline US CPI YoY be ≤2.5% by 2026-12-31?
Position: YES
caliber 70
Deer Point Macromedium
Will the short end move to 310 bps or lower by 2026-12-31?
Position: YES
caliber 67
Deer Point Macromedium
Will the Z6/Z8 curve flatten by at least 65 basis points by 2026-12-31?
Position: YES
caliber 65
Key numbers
What anchors the cluster
Some FOMC participants remain focused on the risk that inflation progress toward the 2% target has stalled, while others are increasingly attentive to emerging weakness in the labor market.
Some FOMC participants remain focused on the risk that inflation progress toward the 2% target has stalled, while others are increasingly attentive to emerging weakness in the labor market.
Some FOMC participants remain focused on the risk that inflation progress toward the 2% target has stalled, while others are increasingly attentive to emerging weakness in the labor market.
In Bank of America’s latest monthly survey of global fund managers, 40% of respondents said an inflationary wave was the biggest tail risk for markets, while 78% expected the Federal Reserve to either cut rates or leave them unchanged over the next year.
Consensus has converged on a comfortable story for next year: modest Fed easing, a steeper curve, broader equity participation, and growth normalising without a recession. The story is plausible. What is harder to defend is the price the rates market is putting on everything that is not that story. Downside tail risk
Glossary · downside tail risk
Downside tail risk is the probability of low-likelihood, high-severity adverse outcomes residing in the left tail of a return or macro distribution. It captures losses far beyond normal variance — the rare but ruinous events that Gaussian models systematically underweight and that dominate portfolio and policy risk.
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in rates — the scenario where labour cracks faster than inflation falls and the Fed is dragged back toward the lower bound — is being treated as a curiosity rather than a position.
The Federal Open Market Committee is the Federal Reserve's rate-setting body, comprising the seven Board governors plus five of the twelve regional Reserve Bank presidents on a rotating basis. It sets the federal funds target range, directs open-market operations, and publishes the policy statement and economic projections that anchor global rate expectations.
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itself has stopped pretending the committee is unified. The October minutes describe a split in plain language: some participants remain focused on inflation progress toward the 2 percent target having stalled, while others are increasingly attentive to emerging weakness in the labour market. That is not a committee with a base case
Glossary · modal outcome
The modal outcome is the single most probable scenario in a probability distribution — the mode, not the mean. In macro forecasting it names the path the market or a policymaker treats as the base case, distinct from the probability-weighted average across all scenarios.
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. It is a committee with two base cases, each held by a different faction, and a policy path that will be dictated by whichever data series moves first. Markets are pricing the inflation-dominant branch and almost nothing else.
Deer Point Macro's base case captures the constructive consensus cleanly: the short end drifts toward roughly 310 basis points
Glossary · 25bp / bp
A basis point (bp) is one-hundredth of a percentage point (0.01%); 25bp equals 0.25 percentage points, the conventional increment of a single central-bank rate move. Policymakers quote rate changes, yields, and spreads in basis points to avoid the ambiguity of percentage-of-a-percentage phrasing.
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while the 10-year stays anchored near 410, delivering another 30 basis points of 2s10s
Glossary · 2s10s
2s10s is the spread between the 2-year and 10-year US Treasury yields, the most-watched gauge of yield-curve slope. A positive (steeper) reading reflects normal upward-sloping curves; a negative (inverted) reading — long yields below short yields — has historically preceded US recessions.
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steepening — the spread between two- and ten-year Treasury yields — and clearing the way for financials and small caps. The same shop, however, flags that historically the Fed has cut rates with a positive output gap
Glossary · output gap
The output gap is the percentage difference between an economy's actual output and its potential output — the level sustainable without generating inflationary pressure. A positive gap signals demand running hot; a negative gap signals slack. It is a central, if unobservable, input to monetary policy and Phillips-curve inflation forecasts.
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(actual GDP running above potential) only 22.6 percent of the time, and rarely when the gap exceeds one to two percent. Easing into an economy that is not yet slack is the unusual path, not the comfortable one.
The zero lower bound is not dead
The cleanest evidence of mispriced downside comes from the derivatives complex itself. Liberty Street Economics, working from SOFR
Glossary · SOFR
SOFR is the Secured Overnight Financing Rate, the volume-weighted median cost of borrowing cash overnight collateralised by US Treasuries in the repo market. Published daily by the New York Fed, it is the dollar replacement for LIBOR and the benchmark underpinning most dollar derivatives and floating-rate debt.
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(the Secured Overnight Financing Rate) options, puts the market-implied probability of rates returning to the zero lower bound within seven years at roughly 9 percent. That is not nothing, and it is materially higher than the qualitative tone of risk-asset positioning would imply. Capital Flows Research argues the melt-up
Glossary · melt-up
A melt-up is a rapid, self-reinforcing surge in risk-asset prices driven by momentum, positioning, and fear-of-missing-out rather than improving fundamentals. Valuations expand as price-insensitive and trend-following flows chase a rising tape, the mirror image of a panicked sell-off or meltdown.
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in credit and equities is being driven precisely by collapsing short real rates and a regime-priced SOFR curve — in other words, the same instruments that quietly carry
Glossary · carry
Carry is the income earned (or paid) for holding a position over time, independent of price change — the coupon, yield, or interest-rate differential captured while waiting. Positive carry pays you to hold; negative carry costs you. It is the return that accrues if nothing moves.
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the left-tail premium are funding the right-tail trade.
Two base cases inside one committee is not consensus. It is a coin flip dressed as guidance.
— The Ledger Desk
The operational read. The forecasts in the dossier sit overwhelmingly on the same side — curve steepener, modest easing, no return to the lower bound — with Deer Point's roughly 310 basis point short-end call and the Fed's own balance-sheet pivot (ending quantitative tightening on 1 December and reinvesting MBS principal into Treasury bills) reinforcing the constructive frame. The only genuine dissent comes from the SOFR options market itself, which keeps quietly bidding the 9 percent ZLB tail. For a macro book, the cleaner expression is not to fade the base case but to own the convexity
Glossary · convexity
Convexity is the curvature in the relationship between an asset's price and an underlying variable such as yield — the second-order term beyond linear (delta or duration) sensitivity. Positive convexity means gains accelerate and losses decelerate as the variable moves, an asymmetry that rewards holders when volatility rises.
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the base case is leaving on the floor: receivers in the front end, long-dated TIPS as inflation insurance on the other tail, and short duration
Glossary · duration
Duration is the sensitivity of a bond's price to a change in interest rates, expressed in years. A duration of 7 means a 100bp yield rise cuts price roughly 7%. It is the primary measure of interest-rate risk in fixed-income portfolios.
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in nominal credit where the carry no longer compensates. As one allocator put it, the bond book is the safe part of the portfolio — which is precisely why it should not be the place taking directional risk into a two-headed Fed.
Briefings are synthesised by the Ledger Desk from multiple sources cited in the sidebar. They are distinct from Articles, which are written by named contributors and carry a tracked Calibration Index. The Desk does not currently carry a Brier score; this is a deliberate choice for the v0.1 editorial layer and will be revisited.
Voices
On the wire
“reports of the death of low r-star are greatly exaggerated.”
“I don't want to take risk in the bond market, that's a safe side, safe part of my portfolio. I don't want a lot of duration, I don't want long maturities.”
