Rates

US Rates Sell Off Across The Curve, Led By The Front End, Driven By A Repricing Of Short-Term Inflation Expectations

The recent US activity data has been strong, and core inflation has been coming down very slowly, pointing to a possible reacceleration of inflation: the risk of overtightening has come down and the risk of not doing enough has gone up

Published ET

US TIPS Inflation Breakevens | Sources: phipost.com, Refinitiv data

US TIPS Inflation Breakevens | Sources: phipost.com, Refinitiv data

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US RATES OUTLOOK

  • The strength of the hard data we've seen this month has led to a significant sell-off at the front end of the curve and reduction in the forward curve inversion, with 1Y forward 1Y rising about 85bp

1Y Forward 1Y USD OIS | Source: Refinitiv

December 2025 3M SOFR Futures Implied Yield, and 1Y forward 1Y USD OIS | Source: Refinitiv

  • Market pricing is sensible: Fed Funds futures now price in 100% probability of 25bp hikes in March and May, with rates peaking at 5.28% after the July FOMC
  • But unless the hard data continues to come in on the hot side of expectations, we're likely to see the July FOMC pricing lighten up over the coming weeks
  • Further down the curve, it's hard to see the Fed Funds rate remain above 5% for a long period without also seeing an increase in the neutral rate: 3M USD OIS at 3.20% from 2026 looks light if inflation and growth prove more persistent

3M USD OIS Forward Rates | Sources: phipost.com, Refinitiv data

WEEKLY US RATES SUMMARY

  • The treasury yield curve flattened, with the 1s10s spread tightening -3.7 bp, now at -117.6 bp (YTD change: -34.3bp)
  • 1Y: 4.9918% (up 11.0 bp)
  • 2Y: 4.6148% (up 9.0 bp)
  • 5Y: 4.0265% (up 9.9 bp)
  • 7Y: 3.9369% (up 8.2 bp)
  • 10Y: 3.8158% (up 7.3 bp)
  • 30Y: 3.8647% (up 3.8 bp)
  • US treasury curve spreads: 3m2Y at -19.5bp (up 5.4bp this week), 2s5s at -58.8bp (down -0.1bp), 5s10s at -21.1bp (down -2.8bp), 10s30s at 4.9bp (down -2.8bp)
  • TIPS 1Y breakeven inflation at 3.11% (up 48.9bp); 2Y at 2.64% (up 11.1bp); 5Y at 2.45% (up 4.0bp); 10Y at 2.38% (up 3.0bp); 30Y at 2.34% (up 3.3bp)
  • US 5-Year TIPS Real Yield: +6.0 bp at 1.5410%; 10-Year TIPS Real Yield: +4.3 bp at 1.4560%; 30-Year TIPS Real Yield: -1.1 bp at 1.5340%

US MACRO RELEASES OVER THE PAST WEEK

US economic data last week | Sources: phipost.com, Refinitiv data

US Treasury Curve Spreads | Sources: phipost.com, Refinitiv dataUS TIPS Inflation Breakevens | Sources: phipost.com, Refinitiv data

US ECONOMIC DATA IN THE WEEK AHEAD

  • The main focus next week will be on January PCE and housing data, with the minutes of the FOMC now pretty stale

US economic data next week | Sources: phipost.com, Refinitiv data

US TREASURY AUCTIONS IN THE WEEK AHEAD

  • Tuesday at 1:00PM: $42bn in 2Y notes
  • Wednesday at 11:30AM: $22bn in 2Y FRNs
  • Wednesday at 1:00PM: $43bn in 5Y notes
  • Thursday at 1:00PM: $35bn in 7Y notes

FED SPEAKERS IN THE WEEK AHEAD

  • Thursday 10:50AM: Atlanta Fed President Bostic
  • Thursday 2:00PM: San Francisco Fed President Daly
  • Friday 10:15AM: Fed Governor Jefferson and Cleveland Fed President Mester
  • Friday 1:30PM: Boston Fed President Collins
  • Friday 1:30PM: Fed Governor Waller

US FORWARD RATES

  • Fed Funds futures now price in 27.5bp of Fed hikes by the end of March 2023, 50.7bp (2.0 x 25bp hikes) by the end of May 2023, and 2.6 hikes by the end of June 2023
  • Implied yields on 3-month SOFR futures top out at 5.28% for the September 2023 expiry and price in 206bp of rate cuts over the following easing cycle
Fed Funds Forward Rates Curve | Sources: phipost.com, Refinitiv data3M SOFR Futures Peak Rate & Easing Over Following Years | Sources: phipost.com, Refinitiv data

US INFLATION & REAL RATES TODAY

  • TIPS 1Y breakeven inflation at 3.11% (up 14.5bp); 2Y at 2.64% (up 0.4bp); 5Y at 2.45% (down -2.2bp); 10Y at 2.38% (down -1.1bp); 30Y at 2.34% (down -1.7bp)
  • 6-month spot US CPI swap down -0.2 bp to 2.951%, with a steepening of the forward curve
  • US Real Rates: 5Y at 1.5410%, -2.6 bp today; 10Y at 1.4560%, -3.5 bp today; 30Y at 1.5340%, -5.4 bp today
Forward-Starting 6-Month Inflation Swaps | Sources: phipost.com, Refinitiv dataUS TIPS Real Yields | Sources: phipost.com, Refinitiv data

RATES VOLATILITY & LIQUIDITY TODAY

  • USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) down -6.3 vols at 83.4 normals
  • 3-Month LIBOR-OIS spread down 0.0 bp at 6.9 bp (18-months range: -11.3 to 39.3 bp)
USD 3 Month Into 2Y Swaption Implied Volatility Smile | Sources: phipost.com, Refinitiv dataInterbank Money Market Spreads | Sources: phipost.com, Refinitiv data

KEY INTERNATIONAL RATES TODAY

  • Germany 5Y: 2.494% (down -1.6 bp); the German 1Y-10Y curve is 1.9 bp flatter at -54.6bp (YTD change: +1.8 bp)
  • Japan 5Y: 0.216% (up 1.9 bp); the Japanese 1Y-10Y curve is 0.2 bp steeper at 60.0bp (YTD change: -40.5 bp)
  • China 5Y: 2.703% (down -0.2 bp); the Chinese 1Y-10Y curve is 3.8 bp flatter at 67.6bp (YTD change: -72.9 bp)
  • Switzerland 5Y: 1.343% (down -0.8 bp); the Swiss 1Y-10Y curve is 0.8 bp steeper at -12.3bp (YTD change: -6.4 bp)

2Y US-DE Rates Differential vs EUR/USD Spot | Sources: phipost.com, Refinitiv data

GLOBAL 5-YEAR NOMINAL INTEREST RATES DIFFERENTIALS TODAY

  • US-GERMANY: +0.9 bp at 176.9 bp (Weekly change: +2.8 bp; YTD change: +3.3 bp)
  • US-JAPAN: +0.4 bp at 469.3 bp (Weekly change: +14.2 bp; YTD change: +30.0 bp)
  • US-CHINA: -3.0 bp at 220.2 bp (Weekly change: +7.6 bp; YTD change: +1.9 bp)

GLOBAL 10-YEAR REAL INTEREST RATES DIFFERENTIALS TODAY

  • US-GERMANY: -1.5 bp at 137.4 bp (Weekly change: +3.2bp; YTD change: +8.6bp)
  • US-JAPAN: -2.4 bp at 163.5 bp (Weekly change: +2.7bp; YTD change: -40.4bp)
  • GERMANY-JAPAN: -0.9 bp at 26.1 bp (Weekly change: -0.5bp; YTD change: -49.0bp)
Money Markets Forward Rates Curves | Sources: phipost.com, Refinitiv dataFX Majors This Week | Sources: phipost.com, Refinitiv data