US Curve Flattens Further, As Short Rates Rise And Long Rates Fall

A look at the forward rates curve points to a very shallow hiking cycle for the Fed, an indication that a true normalization of rates will be difficult in an economy used to cheap financing

Published Jul 1, 2021 11:20 PM ET

Expectations of rate hikes have increased for the next 2 years and sharply decreased thereafter | Sources: ϕpost, Refinitiv data

QUICK US SUMMARY

Yield curve flattening, with the 1s10s Treasury spread tightening -0.8 bp on the day, now at 138.9 bp (YTD change: +58.4)
1Y: 0.0710% (unchanged)
2Y: 0.2547% (up 0.2 bp)
5Y: 0.8926% (up 0.2 bp)
7Y: 1.2313% (down 0.7 bp)
10Y: 1.4595% (down 0.8 bp)
30Y: 2.0647% (down 2.4 bp)
US treasury curve spreads: 2s5s at 63.8bp (down -0.1bp today), 5s10s at 56.7bp (down -1.0bp today), 10s30s at 60.5bp (down -1.6bp today)
Treasuries butterfly spreads: 2s5s10s at -7.5bp (down -1.0bp today), 5s10s30s at 3.6bp (down -0.2bp today)

US MACRO RELEASES

Construction Spending, Change P/P for May 2021 (U.S. Census Bureau) at -0.30 %, below consensus estimate of 0.40 %
ISM Manufacturing, Employment for Jun 2021 (ISM, United States) at 49.90
ISM Manufacturing, New orders for Jun 2021 (ISM, United States) at 66.00
ISM Manufacturing, PMI total for Jun 2021 (ISM, United States) at 60.60 , below consensus estimate of 61.00
ISM Manufacturing, Prices for Jun 2021 (ISM, United States) at 92.10, above consensus estimate of 86.50
Jobless Claims, National, Continued for W 19 Jun (U.S. Dept. of Labor) at 3.47 Mln, above consensus estimate of 3.38 Mln
Jobless Claims, National, Initial for W 26 Jun (U.S. Dept. of Labor) at 364.00 k, below consensus estimate of 390.00 k
Jobless Claims, National, Initial, four week moving average for W 26 Jun (U.S. Dept. of Labor) at 392.75 k
Announced job layoffs - Tally (Challenger, Gray & Christmas), Volume for Jun 2021 (Challenger) at 20.48 k
PMI, Manufacturing Sector, Total, Final for Jun 2021 (Markit Economics) at 62.10, below consensus estimate of 62.6

Rates Intraday | Sources: ϕpost, Refinitiv data

Spreads Intraday | Sources: ϕpost, Refinitiv data

US FORWARD RATES

3-month USD Libor 5 years forward down 1.3 bp
US Treasury 1-year zero-coupon rate 5 years forward down 2.1 bp, now at 2.00%
1-Year Treasury rates are now expected to increase by 190.2 bp over the next 5 years
The market currently expects the 3-month USD OIS rate to rise by 21.4 bp over the next 18 months (equivalent to 0.9 rate hike) and 111.5 bp over the next 3 years (equivalent to 4.5 rate hikes)

Fed Funds Futures Implied Yields | Sources: phipost, Refinitiv data

Rate Hikes Priced Into 3M USD OIS Forward Curve | Sources: ϕpost, Refinitiv data

Expected Timing Of Rate Hikes | Sources: ϕpost, Refinitiv data

US INFLATION

TIPS 1Y breakeven inflation at 3.18% (up 1.0bp); 2Y at 2.73% (up 1.5bp); 5Y at 2.50% (up 1.9bp); 10Y at 2.33% (up 1.0bp); 30Y at 2.29% (up 0.7bp)
6-month spot US CPI swap down -15.6 bp to 4.297%, with a flattening of the forward curve

US TIPS Breakevens | Sources: ϕpost, Refinitiv data

Short-Term CPI Swap Forward Curve | Sources: ϕpost, Refinitiv data

RATES VOLATILITY & LIQUIDITY

USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) up 1.4% at 16.0%
3-Month LIBOR-OIS spread up 0.9 bp at 7.2 bp (12-months range: 4.5-25.4 bp)

US short term rates volatility | Sources: ϕpost, Refinitiv data

3-Month USD LIBOR-OIS Spread | Sources: ϕpost, Refinitiv data

KEY INTERNATIONAL RATES

Germany 5Y: -0.588% (down -0.2 bp); the German 1Y-10Y curve is 2.4 bp steeper at 42.6bp (YTD change: +27.3 bp)
Japan 5Y: -0.102% (down -1.0 bp); the Japanese 1Y-10Y curve is 1.2 bp flatter at 14.9bp (YTD change: +1.1 bp)
China 5Y: 2.938% (up 0.5 bp); the Chinese 1Y-10Y curve is 2.8 bp steeper at 78.9bp (YTD change: +32.5 bp)
Switzerland 5Y: -0.537% (up 2.3 bp); the Swiss 1Y-10Y curve is 5.0 bp steeper at 57.1bp (YTD change: +30.7 bp)

5-Year Sovereign Rates Differentials | Sources: ϕpost, Refinitiv data

Rate Hikes Expectations | Sources: ϕpost, Refinitiv data