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A curious balance SIGNATURE Aftera turbulent 2025, the US enters 2026 in a curiousbalance ofsofteninglabor markets vs. stable growth, fallinginflation vs. easier fiscal policy, and broad-based demand vs.rising duration supply. The front end should rally as the Fed Anshul Pradhan+1 212 412 3681anshul.pradhan@barclays.com Demi Hu, CFA+1 212 526 7398demi.hu@barclays.com Key Takeaways •In 2025, the administration's policies triggered significant volatility, with fears ranging from arecession to "Sell America," a fiscal crisis and threats to Fed independence. Ultimately, yieldsmoved lower across the curve, as fiscal concerns eased and labor marketssoftened.Despite •We forecast2y, 5y, 10y, and 30y yields to end 2026 at 3.1%, 3.5%, 4.0%, and 4.7%,respectively, 40bp below forwards at the front end and 10bp at the long end (Figure 3). The2s30s Treasury curve should steepen to 160bp. Front-end yields should decline as the Fedcuts towards neutral and the market prices in a premium for more aggressive cuts. Term •Risks to the outlook:Downside risks include a deeper Fed easing cycle if labor marketsweaken more sharply or the Fed reaction function turns decisively dovish, which would pullfront-end yields below 3% and accelerate bull steepening. Upside risks stem from renewed Nominal GDP growthshould moderate over 2026, with real GDP growth near 2% andinflation falling towards the Fed's 2% target, pulling front-end yields lower. The outlook forpersonal income and consumption growth is modest and AI investments should boostgrowth, but less so than in 2025. Inflation progress should resume amid ongoing disinflation The Fed's reaction functionwill be in focus with a new Fed chair, the Supreme Court rulingon Cook and Powell's potential departure in May. In addition, the rotation of Fed presidents Thisdocument 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 its Please see analyst certifications and important disclosures beginning on page 23.Completed: 01-Dec-25, 20:12 GMTReleased: 02-Dec-25, 12:00 GMT could also tilt the committee dovishly. With the outlook justifying cuts to neutral, one thing towatch is how the assessment of the neutral rate itself changes and whether that garnersenough support to cut below 3%. The Fed is likely to start expanding its balance sheet early Fiscal concernshave eased astariffrevenues and lower issuance-weighted yieldsstrengthened the fiscal profile; this progress is at risk next year. Theeffectivetariffrate isrising very gradually and there is a possibility of new fiscal measures such as more Fixed income supplyshould fall in the intermediate sector, led by a $470bn reduction in netissuance of Treasury notes/bonds to $1.2trn. Still, duration supply at the long end is likely torise, led by investment grade corporate bonds. Demand for US debt is likely to remain broad- TIPS:CPI inflation is likely to moderate over 2026 as thetariffeffectfades, with two-sidedrisks. Shelter inflation could fall more abruptly, given immigration constrains. On the otherhand, a new fiscal stimulus would likely delay the moderation in inflation to outer years. The Funding conditionsare expected to improve in 2026 as QT ends and SOMA growth resumes,enabling Fed T-bill purchases to ease supply pressures. Persistent money fund inflows andexpanding GSIB balance sheet capacity should support normalization, while forthcoming Swap spreadsin the front to belly have the most upside from regulatory developments, inour view, along with the Fed being a net buyer of T-bills to contain repo pressures. Whileregulatory relief should ease balance sheet constraints and enhance dealer capacity for repo Implied and realized volatilityacross US rates are unusually low, given the current level ofrates, reflecting market confidence in a benign growth and inflation outlook as the Fed movestoward policy normalization. However, this calm may be masking asymmetric risks to rates in Market Implications Duration:We maintain our recommendation of being long 2y US Treasuries to position for themarket to price in a faster and deeper cutting cycle than is currently priced. Thelefttail of the Curve:We recommend 2s30s Treasury curve steepeners as the long end should lag in a rally asinvestors demand term premium to extend duration, particularly in a world where fiscal riskslinger, long-end fixed-income supply increases, and investor concern about a dovish Fed grows. TIPS:We think the market will price in higher inflation risk premium in 2026, with our preferredexpression through longs in 10y breakevens. The position could also benefit from the 10y sectorof the TIPS curve coming into better supply/demand balance following the Treasury's decision STIR:With our expectation for funding market pressures to ease next year, we e