NOTABLE HEADLINES

• Consumer inflation rises slightly faster than market consensus: March CPI 2.6% y/y rate (estimate 2.5%)
• The US curve flattened after a solid $24 bn 30-year bond auction that saw stronger than expected demand (1.6bp stop-through).

US TREASURY CURVE

• 2Y: 0.1610% (down 1.0 bp)
• 5Y: 0.8400% (down 5.2 bp)
• 10Y: 1.6230% (down 5.3 bp)
• 30Y: 2.3080% (down 4.0 bp)
• 3m-10Y spread: 160.3 bp (down 5.5 bp)

US FORWARD RATES 

The forward curve still indicates the market expects US rates to rise by 224bp over the next 5 years.

• 3-month USD Libor 5 years forward down 9.0 bp
• US Treasury 1-year rate 5 years forward down 6.8 bp to 2.32%

US INFLATION 

Almost no change in the inflation picture: with the swap curve still inverted, markets expect higher short-term inflation to be reversed quickly.

• TIPS  1Y breakeven inflation at 2.77% (down -0.2bp); 2Y at 2.71% (up 0.5bp); 10Y at 2.31% (up 0.2bp); 30Y at 2.21% (up 0.3bp)
• 6-month forward inflation swap up 1.2 bp to 3.00%

RATES VOLATILITY 

With forward rates expectations stabilizing, interest rate volatility is down further, though still at elevated levels compared to pre-covid, less uncertain times.

• USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) down -2.2% at 53.4% (compared to just 13% in January 2020)

KEY INTERNATIONAL RATES 

Not much change in international rates on Tuesday. As we mentioned before, the formidable rise in US forward rates expectations has not been matched by rates in other major currencies (see chart below).

• Japanese 5Y: -0.094% (unchanged)
• German 5Y: -0.628% (up 0.2 bp)
• Chinese 5Y: 2.977% (down -6.1 bp)
• Swiss 5Y: -0.544% (up 0.5 bp)