Citi's McCormick Sees Steeper Yield Curve Globally

Citi Head of Macro Strategy Jim McCormick warns the Iran war is a significant challenge for global central banks, expecting Asian policymakers to pull back on monetary tightening while boosting fiscal support. He says that combination — less tightening plus greater fiscal stimulus — could steepen the yield curve, pressuring bond markets and complicating rate guidance.

Analysis

A policy mix where fiscal issuance and spending impulses outpace front‑end policy tightening tends to lift term premia even without a large move in expectations for the policy rate; mechanically that raises long yields and steepens curves as portfolio managers demand extra compensation for duration and liquidity. That configuration benefits financial intermediaries with deposit franchises and NII exposure while penalizing long‑duration credit issuers and duration‑heavy asset managers; expect bank net interest margins to widen over the next 3–12 months while IG credit durations reprice higher.

Secondary supply dynamics matter: concentrated sovereign or quasi‑sovereign issuance (Japan, Korea, Taiwan corporates and JGB auctions) will crowd the cash market and push real yields higher, forcing central banks into a choice between yield curve control and higher inflation prints — either outcome raises volatility for curve trading desks and dealer inventories. Watch auction calendars and short‑covering flows; a handful of 5–10bp weaker print on a major Asian auction has historically cascaded into 15–25bp moves in global 10y yields within 48 hours.

Counterparty and macro tail risks are asymmetric. A sudden de‑escalation in geopolitical risk or an unexpected hawkish pivot from the Fed would quickly flatten curves and punish levered steepener positions, while a protracted supply shock (energy spike, prolonged funding gaps) would push the term premium materially wider and reward steepeners and bank balance‑sheet plays over years. Position sizing should therefore reflexively incorporate 2–3 week headline risk and 3–9 month policy/supply windows rather than pure buy‑and‑hold.

Key Decisions for Investors

• Rates steepener via futures: Long 10y on‑the‑run futures (ZN) / short 2y futures (ZT). Entry: initiate if US 2s10s < +100bp; target a 40–80bp widening over 3–9 months. Size: 2–4% risk per macro book; stop‑loss if spread narrows 25–30bp. R/R: skewed — limited carry cost, asymmetric payoff if term premium re‑prices.
• Long bank equity pair: Buy BAC (or JPM) and hedge duration risk by shorting 10yr Treasury futures 1:0.3. Timeframe: 3–12 months to capture NII expansion. Risk: earnings shock or credit weakness; target +25–50% upside on equity leg vs 1–2% cost to carry on the hedge.
• Tail hedges / crisis insurance: Buy TLT Jan 2027 15–20% OTM put spread (or outright longer‑dated Treasury calls) sized as 0.5–1% portfolio insurance to protect against escalation‑driven flight‑to‑quality that would flatten curves and crush bank longs. Cost is premium; payoff is non‑linear and offsets steepener blowups.
• Opportunistic options trade on banks: Buy BAC Jan 2027 35/45 call spread (debit), funded by selling farther‑dated out‑of‑the‑money puts (collect premium). Rationale: levered exposure to NII improvement with defined downside; target 2.5:1 reward/risk if curve steepens as expected over 6–12 months.