US RATES OUTLOOK: JUNE '23 FOMC PREVIEW

• The outcome of this week's FOMC has been well telegraphed by the Fed leadership: a hold / skip
• There is about a 30% chance of a 25bp hike priced in, a premium that is unlikely to pay unless we see an extremely strong CPI surprise on Tuesday

• With 21bp priced in June & July cumulatively, a hike in July is currently the clear market expectation, and the Fed will need to be careful not to sound too dovish
• Despite continued strength in economic data, and elevated inflation, US financial conditions have loosened since the previous FOMC, and the Fed may want to indicate that further loosening is unwarranted / unwanted

• In this context, the market will be mostly focused on forward guidance in the official statement, the dot plot and Powell's presser
• The dot plot will be particularly useful if they want to be more credible about the need to keep rates higher for longer: the previous iteration showed 75bp of cuts in 2024, and the market is still pricing 150bp of cuts next year

WEEKLY US RATES SUMMARY

• The treasury yield curve steepened, with the 1s10s spread widening 8.0 bp, now at -146.1 bp (YTD change: -62.8bp)
• 1Y: 5.2037% (down 3.5 bp)
• 2Y: 4.5946% (up 8.4 bp)
• 5Y: 3.9137% (up 6.4 bp)
• 7Y: 3.8362% (up 4.9 bp)
• 10Y: 3.7423% (up 4.5 bp)
• 30Y: 3.8818% (down 0.6 bp)
• US treasury curve spreads:  3m2Y at -67.2bp (up 21.4bp this week), 2s5s at -68.1bp (down -2.6bp), 5s10s at -17.1bp (down -2.2bp), 10s30s at 13.9bp (down -5.6bp)
• US 5Y TIPS inflation breakeven at 2.16% down 0.7bp; 10Y breakeven at 2.21% up 1.6bp; 30Y breakeven at 2.25% up 2.4bp
• US 5-Year TIPS Real Yield: +6.8 bp at 1.7960%; 10-Year TIPS Real Yield: +3.1 bp at 1.5530%; 30-Year TIPS Real Yield: -2.7 bp at 1.6460%

US ECONOMIC DATA OVER THE PAST WEEK

US MACRO RELEASES IN THE WEEK AHEAD

US TREASURY COUPON-BEARING AUCTIONS IN THE WEEK AHEAD

• Monday 11.30AM: $40bn in 3Y notes
• Monday 1PM: $32bn in 10Y notes
• Tuesday 1PM: $18bn in 30Y bonds

US FORWARD RATES 

• Fed Funds futures now price in 7.3bp of Fed hikes by the end of June 2023, and 21.3bp (0.9 x 25bp hikes) by the end of July 2023
• Implied yields on 3-month SOFR futures top out at 5.30% for the October 2023 expiry and price in 213bp of rate cuts over the following easing cycle

US INFLATION & REAL RATES TODAY

• TIPS 1Y breakeven inflation at 1.89% (down -2.4bp); 2Y at 2.16% (up 0.7bp); 5Y at 2.17% (down -0.9bp); 10Y at 2.22% (down -0.3bp); 30Y at 2.25% (down -0.1bp)
• 6-month spot US CPI swap down -2.1 bp to 2.879%, with a flattening of the forward curve
• US Real Rates: 5Y at 1.7960%, +6.7 bp today; 10Y at 1.5530%, +3.0 bp today; 30Y at 1.6460%, -0.1 bp today

RATES VOLATILITY & LIQUIDITY TODAY

• USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) down -1.5 vols at 143.4 normals
• 3-Month LIBOR-OIS spread down -0.7 bp at 28.7 bp (18-months range: -11.3 to 39.3 bp)

KEY INTERNATIONAL RATES TODAY

 Germany 5Y: 2.420% (down -1.6 bp); the German 1Y-10Y curve is 4.2 bp flatter at -98.2bp (YTD change: -94.3 bp)

Japan 5Y: 0.082% (unchanged 0.0 bp); the Japanese 1Y-10Y curve is 0.7 bp flatter at 57.3bp (YTD change: +16.5 bp)

China 5Y: 2.422% (down -2.6 bp); the Chinese 1Y-10Y curve is 1.2 bp steeper at 83.9bp (YTD change: +10.3 bp)

Switzerland 5Y: 1.010% (down -2.1 bp); the Swiss 1Y-10Y curve is 20.3 bp flatter at -93.1bp (YTD change: -99.4 bp) 

GLOBAL 5-YEAR NOMINAL INTEREST RATES DIFFERENTIALS TODAY

• US-GERMANY: +7.7 bp at 164.6 bp (Weekly change: -0.7 bp; YTD change: -9.0 bp)
• US-JAPAN: +7.1 bp at 466.6 bp (Weekly change: +9.5 bp; YTD change: +27.3 bp)
• US-CHINA: +8.3 bp at 250.4 bp (Weekly change: +13.2 bp; YTD change: +32.1 bp)

GLOBAL 10-YEAR REAL INTEREST RATES DIFFERENTIALS TODAY

• US-GERMANY: +4.1 bp at 147.2 bp (Weekly change: -5.8bp; YTD change: +18.4bp)
• US-JAPAN: +7.8 bp at 242.1 bp (Weekly change: +12.8bp; YTD change: +38.2bp)
• GERMANY-JAPAN: +3.7 bp at 94.9 bp (Weekly change: +18.6bp; YTD change: +19.8bp)