Long Rates Fall With Disappointing US ISM Data And Renewed Lockdowns Across Asia

The implied probability of a rate hike before 2023 has fallen to 50% (from over 90% after the June FOMC) as market reprice for lower forward growth

Published Aug 2, 2021 11:33 PM ET

Implied Fed Hikes Derived from the 3-Month USD OIS Forward Curve | Sources: ϕpost, Refinitiv data

3-Month USD LIBOR +0.6bp today, now at 0.1238%
The treasury yield curve flattened, with the 1s10s spread tightening -4.9 bp, now at 111.3 bp (YTD change: +30.8bp)
1Y: 0.0660% (up 0.3 bp)
2Y: 0.1742% (down 1.4 bp)
5Y: 0.6553% (down 3.8 bp)
7Y: 0.9537% (down 4.6 bp)
10Y: 1.1789% (down 4.7 bp)
30Y: 1.8491% (down 4.6 bp)
US treasury curve spreads: 2s5s at 48.1bp (down -2.5bp), 5s10s at 52.4bp (down -0.8bp), 10s30s at 67.1bp (up 0.2bp today)
Treasuries butterfly spreads: 2s5s10s at 3.9bp (up 1.6bp today), 5s10s30s at 14.7bp (up 1.2bp)
US 5-Year TIPS Real Yield: +0.9 bp at -1.9530%; 10-Year TIPS Real Yield: -0.4 bp at -1.1780%; 30-Year TIPS Real Yield: -1.8 bp at -0.3660%

Construction Spending, Change P/P for Jun 2021 (U.S. Census Bureau) at 0.10 %, below consensus estimate of 0.40 %
ISM Manufacturing, Employment for Jul 2021 (ISM, United States) at 52.90
ISM Manufacturing, New orders for Jul 2021 (ISM, United States) at 64.90
ISM Manufacturing, PMI total for Jul 2021 (ISM, United States) at 59.50, below consensus estimate of 60.90
ISM Manufacturing, Prices for Jul 2021 (ISM, United States) at 85.70
PMI, Manufacturing Sector, Total, Final for Jul 2021 (Markit Economics) at 63.40

US Treasury 1-year zero-coupon rate 5 years forward down 6.8 bp, now at 1.5823%
1-Year Treasury rates are now expected to increase by 151.1 bp over the next 5 years
3-month Eurodollar futures expected hike of 12.5 bp by the end of 2022 (meaning the market prices 50.0% chance of a 25bp hike by end of 2022)
The 3-month USD OIS forward curve prices in 12.2 bp of rate hikes over the next 18 months (equivalent to 0.49 rate hike) and 62.2 bp over the next 3 years (equivalent to 2.49 rate hikes)

TIPS 1Y breakeven inflation at 3.23% (down -13.3bp); 2Y at 2.93% (down -8.9bp); 5Y at 2.68% (down -5.3bp); 10Y at 2.36% (down -4.3bp); 30Y at 2.23% (down -2.7bp)
6-month spot US CPI swap down -36.5 bp to 4.193%, with a flattening of the forward curve
US Real Rates: 5Y at -1.9530%, +0.9 bp today; 10Y at -1.1780%, -0.4 bp today; 30Y at -0.3660%, -1.8 bp today

US TIPS Real Yields | Sources: phipost.com, Refinitiv data

USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) up 0.7% at 15.6%
3-Month LIBOR-OIS spread up 2.0 bp at 6.0 bp (12-months range: 3.7-22.0 bp)

Germany 5Y: -0.749% (down -1.4 bp); the German 1Y-10Y curve is 1.8 bp flatter at 17.2bp (YTD change: +1.6 bp)
Japan 5Y: -0.128% (unchanged 0.0 bp); the Japanese 1Y-10Y curve is 0.3 bp flatter at 13.3bp (YTD change: +0.2 bp)
China 5Y: 2.643% (down -3.0 bp); the Chinese 1Y-10Y curve is 18.6 bp flatter at 69.9bp (YTD change: +23.5 bp)
Switzerland 5Y: -0.687% (down -0.9 bp); the Swiss 1Y-10Y curve is 0.3 bp steeper at 34.3bp (YTD change: +7.5 bp)