Rates

Yields Rise At The Front End, Curve Flattens: 2s5s, 5s10s, 10s30s Spreads All Modestly Tighter

In TIPS, short-term inflation breakevens were much higher, with a continued flattening of the 5s30s reflecting the Fed's strong focus on inflation expectations (at the expense of forward growth)

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Number of Fed Hikes By The End Of 2022, Implied From Fed Funds Futures | Sources: ϕpost, Refinitiv data

Number of Fed Hikes By The End Of 2022, Implied From Fed Funds Futures | Sources: ϕpost, Refinitiv data

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QUICK US SUMMARY

  • 3-Month USD LIBOR -1.19bp today, now at 0.2317%; 3-Month OIS +0.8bp at 0.1560%
  • The treasury yield curve flattened, with the 1s10s spread tightening -3.4 bp, now at 133.8 bp (YTD change: +21.0bp)
  • 1Y: 0.4170% (up 2.3 bp)
  • 2Y: 0.8984% (up 2.8 bp)
  • 5Y: 1.5153% (up 1.2 bp)
  • 7Y: 1.6972% (down 0.2 bp)
  • 10Y: 1.7550% (down 1.1 bp)
  • 30Y: 2.0875% (down 2.9 bp)
  • US treasury curve spreads: 2s5s at 61.7bp (down -1.2bp), 5s10s at 24.0bp (down -2.2bp), 10s30s at 33.2bp (down -2.5bp)
  • Treasuries butterfly spreads: 1s5s10s at -84.8bp (down -1.1bp), 5s10s30s at 8.5bp (down -0.3bp)
  • US 5-Year TIPS Real Yield: +1.0 bp at -1.3040%; 10-Year TIPS Real Yield: -0.7 bp at -0.7720%; 30-Year TIPS Real Yield: -1.9 bp at -0.1840%

US MACRO RELEASES

  • The Conference Board Employment Trends Index (ETI) for Dec 2021 (The Conference Board) at 116.63 (vs 114.49 prior)
  • Wholesale Inventories, Change P/P for Nov 2021 (U.S. Census Bureau) at 1.40 % (vs 1.20 % prior), above consensus estimate of 1.20 %
  • Wholesale Trade, Change P/P for Nov 2021 (U.S. Census Bureau) at 1.30 % (vs 2.20 % prior), below consensus estimate of 1.50 %
US 5Y & 10Y Treasury Yields Intraday | Sources: ϕpost, Refinitiv dataUS Treasury Curve Spreads Intraday | Sources: ϕpost, Refinitiv data

US FORWARD RATES

  • Fed Funds futures now imply changes of 22.4bp (89.5% probability of a 25bp hike) by the end of March 2022 and price in 3.5 hikes by the end of December 2022
  • The 3-month Eurodollar zero curve prices in 105.9 bp of rate hikes over the next 15 months (equivalent to 4.23 rate hikes) and 180.1 bp over the next 3 years (equivalent to 7.20 rate hikes)
  • 1-year US Treasury rate 5 years forward down 2.8 bp, now at 2.0864%, meaning that the 1-year Treasury rate is now expected to increase by 158.4 bp over the next 5 years (equivalent to 6.3 rate hikes), implying a terminal rate around 2% (50bp below the median Fed projection)
Eurodollar Implied Yields | Sources: ϕpost, Refinitiv dataFed Hikes By The End Of March '22 & May '22 | Sources: ϕpost, Refinitiv data

US INFLATION & REAL RATES

  • TIPS 1Y breakeven inflation at 4.99% (up 10.6bp); 2Y at 3.64% (up 7.0bp); 5Y at 2.82% (up 0.5bp); 10Y at 2.50% (up 0.1bp); 30Y at 2.29% (down -1.0bp)
  • 6-month spot US CPI swap down -0.5 bp to 4.506%, with a steepening of the forward curve
  • US Real Rates: 5Y at -1.3040%, +1.0 bp today; 10Y at -0.7720%, -0.7 bp today; 30Y at -0.1840%, -1.9 bp today
US TIPS Inflation Breakevens | Sources: ϕpost, Refinitiv dataUS TIPS Real Yields | Sources: ϕpost, Refinitiv data

RATES VOLATILITY & LIQUIDITY

  • USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) up 2.7% at 54.2%
  • 3-Month LIBOR-OIS spread down -1.2 bp at 7.6 bp (12-months range: 2.6-16.2 bp)
US Rates Volatility | Sources: ϕpost, Refinitiv data3M USD LIBOR-OIS Spot Spread | Sources: ϕpost, Refinitiv data

KEY INTERNATIONAL RATES

  • Germany 5Y: -0.368% (down -0.5 bp); the German 1Y-10Y curve is 2.6 bp flatter at 56.7bp (YTD change: +12.8 bp)
  • Japan 5Y: -0.034% (up 0.4 bp); the Japanese 1Y-10Y curve is 0.5 bp steeper at 20.5bp (YTD change: +4.3 bp)
  • China 5Y: 2.591% (down -3.3 bp); the Chinese 1Y-10Y curve is 0.1 bp steeper at 65.6bp (YTD change: +14.6 bp)
  • Switzerland 5Y: -0.280% (up 0.6 bp); the Swiss 1Y-10Y curve is 0.7 bp steeper at 72.2bp (YTD change: +15.7 bp)
German & US 1Y CPI Swap | Sources: ϕpost, Refinitiv data Changes In Global Rate Hikes Expectations | Sources: ϕpost, Refinitiv data