Slight Steepening Of The US Treasury Curve, But Real Yields Close To Record Lows

Higher inflation expectations are spreading down the forward swap curve, with the markets now pricing in a slower normalization of the short-term inflation surge

Published Jul 26, 2021 11:49 PM ET

Current rate hikes expectations are slightly higher in the short term, much lower in the longer term | Sources: ϕpost, Refinitiv data

QUICK US SUMMARY

3-Month USD LIBOR +0.3bp today, now at 0.1316%
The treasury yield curve steepened, with the 1s10s spread widening 1.6 bp, now at 122.4 bp (YTD change: +41.9bp)
1Y: 0.0710% (down 0.2 bp)
2Y: 0.1961% (down 0.4 bp)
5Y: 0.7262% (up 1.3 bp)
7Y: 1.0414% (up 1.4 bp)
10Y: 1.2946% (up 1.3 bp)
30Y: 1.9470% (up 2.4 bp)
US treasury curve spreads: 2s5s at 53.0bp (up 1.7bp today), 5s10s at 56.8bp (unchanged), 10s30s at 65.3bp (up 1.1bp today)
Treasuries butterfly spreads: 2s5s10s at 3.5bp (down -1.6bp), 5s10s30s at 7.9bp (up 0.9bp)
US 5-Year TIPS Real Yield: -4.3 bp at -1.9180%; 10-Year TIPS Real Yield: -3.7 bp at -1.0970%; 30-Year TIPS Real Yield: -2.7 bp at -0.3430%

US MACRO RELEASES

Building Permits for Jun 2021 (U.S. Census Bureau) at 1.59 Mln
Building Permits, Change P/P for Jun 2021 (U.S. Census Bureau) at -5.30 %
Dallas Fed, General Business Activity for Jul 2021 (Fed Reserve, Dallas) at 27.3, below consensus estimate of 32.5
New Home Sales for Jun 2021 (U.S. Census Bureau) at 0.68 Mln, below consensus estimate of 0.80 Mln
New Home Sales, Change P/P for Jun 2021 (U.S. Census Bureau) at -6.60 %, below consensus estimate of 3.00 %

US TREASURY AUCTIONS

Total accepted bids: $60,739M for 13-Week Bills
$57,365M in 26-Week Bills
$65,746M in 2-Year Notes, priced well with decent bid/cover ratio, stopped at 0.213% (slight stop through from 0.215% "when issued" before the auction)

US Rates Intraday | Sources: ϕpost, Refinitiv data

US Treasury Curve Spreads Intraday | Sources: ϕpost, Refinitiv data

US FORWARD RATES

US Treasury 1-year zero-coupon rate 5 years forward up 2.3 bp, now at 1.7366%
1-Year Treasury rates are now expected to increase by 165.9 bp over the next 5 years
3-month Eurodollar futures expected hike of 17.0 bp by the end of 2022 (meaning the market prices 68.0% chance of a 25bp hike by end of 2022)
The 3-month USD OIS forward curve prices in 16.6 bp of rate hikes over the next 18 months (equivalent to 0.67 rate hike) and 71.2 bp over the next 3 years (equivalent to 2.85 rate hikes)

Current Market Expecations For Fed Rate Hikes | Sources: ϕpost, Refinitiv data

Changes in US 1Y Forward Rate | Sources: ϕpost, Refinitiv data

US INFLATION & REAL RATES

TIPS 1Y breakeven inflation at 3.45% (up 14.6bp); 2Y at 3.02% (up 25.4bp); 5Y at 2.74% (up 17.7bp); 10Y at 2.39% (up 5.0bp); 30Y at 2.31% (up 5.1bp)
6-month spot US CPI swap up 6.3 bp to 3.962%, with a steepening of the forward curve
US TIPS Real Yields keep falling, with the 10Y now at -1.0970%

6-Month CPI Swap Spot & Forward | Sources: ϕpost, Refinitiv data

US TIPS Real Yields | Sources: ϕpost, Refinitiv data

RATES VOLATILITY & LIQUIDITY

USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) up 0.9% at 16.8%
3-Month LIBOR-OIS spread up 0.2 bp at 5.1 bp (12-months range: 3.7-23.6 bp)

Short-Term US Interest Rates Volatility | Sources: ϕpost, Refinitiv data

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

KEY INTERNATIONAL RATES

Germany 5Y: -0.697% (down -0.1 bp); the German 1Y-10Y curve is 0.6 bp steeper at 23.3bp (YTD change: +7.8 bp)
Japan 5Y: -0.131%; the Japanese 1Y-10Y curve at 14.3bp (YTD change: -0.2 bp)
China 5Y: 2.684% (down -4.5 bp); the Chinese 1Y-10Y curve is 0.1 bp flatter at 96.1bp (YTD change: +49.7 bp)
Switzerland 5Y: -0.669% (up 0.7 bp); the Swiss 1Y-10Y curve is 2.2 bp flatter at 35.5bp (YTD change: +10.1 bp)

Expected Hikes Over The Next 5 Years | Sources: ϕpost, Refinitiv data

Changes in Expected Hikes | Sources: ϕpost, Refinitiv data