US Rates Rise And Treasury Curve Steepens Further After Bounce Yesterday

Short rates remain higher and long rates much lower than they were at the height of the "reflation theme" 4 months ago, as Fed tapering is now very much on the table, a prospect that markets consider harmful to growth

Published Jul 21, 2021 4:31 PM ET

Implied Hikes From the 3-month USD OIS forward curve | Sources: ϕpost, Refinitiv data

QUICK US SUMMARY

Yield curve steepening, with the 1s10s Treasury spread widening 7.0 bp on the day, now at 121.8 bp (YTD change: +41.3)
1Y: 0.0740% (unchanged)
2Y: 0.2098% (up 0.8 bp)
5Y: 0.7378% (up 5.3 bp)
7Y: 1.0464% (up 6.7 bp)
10Y: 1.2917% (up 7.0 bp)
30Y: 1.9400% (up 6.3 bp)
US treasury curve spreads: 2s5s at 52.8bp (up 4.5bp today), 5s10s at 55.4bp (up 1.7bp today), 10s30s at 64.9bp (down -0.7bp)
Treasuries butterfly spreads: 2s5s10s at 2.2bp (down -2.8bp), 5s10s30s at 9.6bp (down -1.7bp)
US 5-Year TIPS Real Yield: +0.1 bp at -1.7730%; 10-Year TIPS Real Yield: +3.9 bp at -1.0110%; 30-Year TIPS Real Yield: +3.6 bp at -0.2530%

COMMENTARY

As mentioned last month, we still believe markets are pricing in a policy error from the Fed: a premature rate hike leading to a growth slowdown, followed by a reversal of policy and a much lower terminal rate
Credit Suisse analysts also consider the "policy mistake" as the central economic scenario for fixed income markets:

Source: Credit Suisse

US MACRO RELEASES

MBA Mortgage Applications Survey composite index, weekly percentage change, Change P/P for W 16 Jul (MBA, USA) at -4.00 %
Mortgage applications, market composite index for W 16 Jul (MBA, USA) at 698.30
Mortgage applications, market composite index, purchase for W 16 Jul (MBA, USA) at 255.80
Mortgage applications, market composite index, refinancing for W 16 Jul (MBA, USA) at 3267.60
Mortgage Lending Rates, FRM 30-Year Contract Rate (MBA Sourced) for W 16 Jul (MBA, USA) at 3.11 %

US Rates Intraday | Sources: ϕpost, Refinitiv data

US Treasury Curve Spreads | Sources: ϕpost, Refinitiv data

US FORWARD RATES

US Treasury 1-year zero-coupon rate 5 years forward up 9.9 bp, now at 1.7309%
1-Year Treasury rates are now expected to increase by 165.0 bp over the next 5 years
3-month Eurodollar futures expected hike of 17.2 bp by the end of 2022 (meaning the market prices 68.7% chance of a 25bp hike by end of 2022)
The 3-month USD OIS forward curve prices in 71.7 bp over the next 3 years (equivalent to 2.87 rate hikes), down sharply from 105bp last month

Expected changes in US 1Y Treasury Rate | Sources: ϕpost, Refinitiv data

Timing of rate hikes from the 3m USD OIS curve | Sources: ϕpost, Refinitiv data

US INFLATION & REAL RATES

TIPS 1Y breakeven inflation at 3.24% (up 10.4bp); 2Y at 2.67% (up 4.8bp); 5Y at 2.48% (up 4.8bp); 10Y at 2.28% (up 2.8bp); 30Y at 2.21% (up 2.6bp)
6-month spot US CPI swap up 10.3 bp to 3.904%, with a flattening of the forward curve

US TIPS Breakevens | Sources: ϕpost, Refinitiv data

6-Month CPI Swap 5 Years Forward | Sources: ϕpost, Refinitiv data

RATES VOLATILITY & LIQUIDITY

USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) down -1.0% at 15.8%
3-Month LIBOR-OIS spread unchanged at 5.8 bp (12-months range: 3.7-23.6 bp)

US STIR Volatility | Sources: ϕpost, Refinitiv data

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

KEY INTERNATIONAL RATES

Germany 5Y: -0.678% (up 0.8 bp); the German 1Y-10Y curve is 1.4 bp steeper at 24.5bp (YTD change: +8.6 bp)
Japan 5Y: -0.122% (unchanged); the Japanese 1Y-10Y curve is 0.3 bp flatter at 14.4bp (YTD change: -0.1 bp)
China 5Y: 2.740% (down -2.1 bp); the Chinese 1Y-10Y curve is 1.5 bp flatter at 96.9bp (YTD change: +50.5 bp)
Switzerland 5Y: -0.666% (up 1.6 bp); the Swiss 1Y-10Y curve is 2.4 bp steeper at 45.7bp (YTD change: +15.3 bp)

US CN DE JP Rate Hikes Expectations | Sources: ϕpost, Refinitiv data

Expected Changes in 1Y Rate 5 Years Forward | Sources: ϕpost, Refinitiv data