US RATES OUTLOOK

• The US curve has continued to bear steepen, with the front end well anchored (just 40% probability of another hike now priced in)
• But the price action in the rates complex has been puzzling to many, for several reasons: 1) US economic data has come in relatively soft and leading firms (including Goldman) have adjusted their forecasts down for 4Q23 and 1Q24; 2) all of the move has been in real yields, with breakevens staying put despite the rise in crude prices (Brent settling around $95/bbl) and fears of inflation reacceleration; 3) the COT report shows that speculative net positioning hasn't changed since August
• It's best to understand what's happened from a risk management perspective: large moves in a short time (i.e. an increase in volatility) creates a VAR shock for portfolio managers and dealers, who have to adjust their positioning, leading to second-order effects (more selling in this case)
• A positive development is that we're not seeing in an increase in upside implied volatility skew (ATM+100bp / ATM) at the long end, meaning that most of the gamma move might be done

6-Month Into 30Y USD swaption implied volatility skew (ATM+100bp/ATM) | Source: Refinitiv

• Considering solely the economic / macro picture, the rise in yields at the long end looks overdone, and we should see a reversal before year end. The timing is tricky because of the current volatility, but should happen when things start to calm down.

WEEKLY US RATES SUMMARY

• The treasury yield curve steepened, with the 1s10s spread widening 13.3 bp, now at -88.4 bp (YTD change: -5.0bp)
• 1Y: 5.4621% (up 1.0 bp)
• 2Y: 5.0509% (down 5.9 bp)
• 5Y: 4.6143% (up 5.0 bp)
• 7Y: 4.6204% (up 9.5 bp)
• 10Y: 4.5783% (up 14.3 bp)
• 30Y: 4.7076% (up 18.0 bp)
• US treasury curve spreads:  3m2Y at -43.0bp (down -5.5bp this week), 2s5s at -43.7bp (up 11.7bp), 5s10s at -3.6bp (up 8.4bp), 10s30s at 12.9bp (up 3.8bp)
• US 5Y TIPS inflation breakeven at 2.25% down 6.5bp; 10Y breakeven at 2.34% down 3.2bp; 30Y breakeven at 2.40% up 2.4bp
• US 5-Year TIPS Real Yield: +9.8 bp at 2.4110%; 10-Year TIPS Real Yield: +17.9 bp at 2.2450%; 30-Year TIPS Real Yield: +16.0 bp at 2.3290%

US ECONOMIC DATA OVER THE PAST WEEK

US MACRO RELEASES IN THE WEEK AHEAD

FED SPEAKERS IN THE WEEK AHEAD

•  Monday 11:00 AM: Fed Chair Powell and Philadelphia Fed President Harker
• Monday 1:30 PM: New York Fed President
• Monday 7:30 PM: Cleveland Fed President Mester
• Tuesday 8:00 AM: Atlanta Fed President Bostic
• Wednesday 10:25 AM: Fed Governor Bowman
• Wednesday 10:30 PM: Chicago Fed President Goolsbee
• Thursday 9:00 AM: Cleveland Fed President Mester
• Friday 12:00 PM: San Francisco Fed President Daly

US FORWARD RATES 

• Fed Funds futures now price in 4.7bp of Fed hikes by the end of November 2023, 10.0bp (40% chance of another 25bp hike) by the end of December 2023
• Implied yields on 3-month SOFR futures top out at 5.45% for the March 2024 expiry and price in 152bp of rate cuts over the following easing cycle

US INFLATION & REAL RATES TODAY

• TIPS  1Y breakeven inflation at 2.42% (down -6.6bp); 2Y at 2.32% (down -5.7bp); 5Y at 2.35% (down -4.5bp); 10Y at 2.34% (down -3.9bp); 30Y at 2.40% (down -2.9bp)
• 6-month spot US CPI swap down -1.3 bp to 2.768%, with a steepening of the forward curve
• US Real Rates: 5Y at 2.4110%, +3.0 bp today; 10Y at 2.2450%, +3.9 bp today; 30Y at 2.3290%, +2.9 bp today

RATES VOLATILITY & LIQUIDITY TODAY

• USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) up 2.2 vols at 74.8 normals (up 12.1 normals from a week ago)
• Liquidity is not an issue, not seeing any widening in money market spreads

KEY INTERNATIONAL RATES TODAY

• Germany 5Y: 2.788% (down -14.2 bp); the German 1Y-10Y curve is 8.5 bp flatter at -84.8bp (YTD change: -82.2 bp)
• Japan 5Y: 0.317% (up 1.5 bp); the Japanese 1Y-10Y curve is 1.3 bp steeper at 80.4bp (YTD change: +39.7 bp)
• China 5Y: 2.523% (down -2.5 bp); the Chinese 1Y-10Y curve is 3.8 bp steeper at 55.1bp (YTD change: -18.5 bp)
• Switzerland 5Y: 1.064% (down -5.0 bp); the Swiss 1Y-10Y curve is 10.7 bp flatter at -72.7bp (YTD change: -79.0 bp)

GLOBAL 5-YEAR NOMINAL INTEREST RATES DIFFERENTIALS TODAY

• US-GERMANY: +3.5 bp at 185.1 bp (Weekly change: -2.1 bp; YTD change: +11.5 bp)
• US-JAPAN: -6.6 bp at 500.7 bp (Weekly change: -8.3 bp; YTD change: +61.4 bp)
• US-CHINA: -1.3 bp at 286.7 bp (Weekly change: -1.8 bp; YTD change: +68.4 bp)

GLOBAL 10-YEAR REAL INTEREST RATES DIFFERENTIALS TODAY

• US-GERMANY: +9.8 bp at 177.9 bp (Weekly change: -2.1bp; YTD change: +49.1bp)
• US-JAPAN: +3.0 bp at 273.0 bp (Weekly change: +14.2bp; YTD change: +69.1bp)
• GERMANY-JAPAN: -6.8 bp at 95.1 bp (Weekly change: +16.3bp; YTD change: +20.0bp)